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• Write Your Business Plan | Part 1 Overview Video
• The Basics of Writing a Business Plan
• How to Use Your Business Plan Most Effectively
• 12 Reasons You Need a Business Plan
• The Main Objectives of a Business Plan
• What to Include and Not Include in a Successful Business Plan
• The Top 4 Types of Business Plans
• A Step-by-Step Guide to Presenting Your Business Plan in 10 Slides
• 6 Tips for Making a Winning Business Presentation
• 3 Key Things You Need to Know About Financing Your Business
• 12 Ways to Set Realistic Business Goals and Objectives
• How to Perfectly Pitch Your Business Plan in 10 Minutes
• Write Your Business Plan | Part 2 Overview Video
• How to Fund Your Business Through Friends and Family Loans and Crowdsourcing
• How to Fund Your Business Using Banks and Credit Unions
• How to Fund Your Business With an SBA Loan
• How to Fund Your Business With Bonds and Indirect Funding Sources
• How to Fund Your Business With Venture Capital
• How to Fund Your Business With Angel Investors
• How to Use Your Business Plan to Track Performance
• How to Make Your Business Plan Attractive to Prospective Partners
• Is This Idea Going to Work? How to Assess the Potential of Your Business.
• When to Update Your Business Plan
• Write Your Business Plan | Part 3 Overview Video
• How to Write the Management Team Section to Your Business Plan
• How to Create a Strategic Hiring Plan
• How to Write a Business Plan Executive Summary That Sells Your Idea
• How to Build a Team of Outside Experts for Your Business
• Use This Worksheet to Write a Product Description That Sells
• What Is Your Unique Selling Proposition? Use This Worksheet to Find Your Greatest Strength.
• How to Raise Money With Your Business Plan
• Customers and Investors Don't Want Products. They Want Solutions.
• Write Your Business Plan | Part 4 Overview Video
• 5 Essential Elements of Your Industry Trends Plan
• How to Identify and Research Your Competition
• Who Is Your Ideal Customer? 4 Questions to Ask Yourself.
• How to Identify Market Trends in Your Business Plan
• How to Define Your Product and Set Your Prices
• How to Determine the Barriers to Entry for Your Business
• How to Get Customers in Your Store and Drive Traffic to Your Website
• How to Effectively Promote Your Business to Customers and Investors
• Write Your Business Plan | Part 5 Overview Video
• What Equipment and Facilities to Include in Your Business Plan
• How to Write an Income Statement for Your Business Plan
• How to Make a Balance Sheet
• How to Make a Cash Flow Statement
• How to Use Financial Ratios to Understand the Health of Your Business
• How to Write an Operations Plan for Retail and Sales Businesses
• How to Make Realistic Financial Forecasts
• How to Write an Operations Plan for Manufacturers
• What Technology Needs to Include In Your Business Plan
• How to List Personnel and Materials in Your Business Plan
• The Role of Franchising
• The Best Ways to Follow Up on a Buisiness Plan
• The Best Books, Sites, Trade Associations and Resources to Get Your Business Funded and Running
• How to Hire the Right Business Plan Consultant
• Business Plan Lingo and Resources All Entrepreneurs Should Know
• How to Write a Letter of Introduction
• What To Put on the Cover Page of a Business Plan
• How to Format Your Business Plan
• 6 Steps to Getting Your Business Plan In Front of Investors

How to Write an Income Statement for Your Business Plan Your income statement shows investors if you are making money. Here's everything you'll need to create one.

By Eric Butow Edited by Dan Bova Oct 27, 2023

Key Takeaways

• An income statement is your business's bottom line: your total revenue from sales minus all of your costs.

Opinions expressed by Entrepreneur contributors are their own.

This is part 3 / 12 of Write Your Business Plan: Section 5: Organizing Operations and Finances series.

Financial data is always at the back of the business plan, but that doesn't mean it's any less important than up-front material such as the description of the business concept and the management team. Astute investors look carefully at the charts, tables, formulas, and spreadsheets in the financial section because they know that this information is like the pulse, respiration rate, and blood pressure in a human being. It shows the condition of the patient. In fact, you'll find many potential investors taking a quick peek at the numbers before reading the plan.

Related: How to Make Realistic Financial Forecasts

Financial statements come in threes: income statement, balance sheet, and cash flow statement. Taken together they provide an accurate picture of a company's current value, plus its ability to pay its bills today and earn a profit going forward. This information is very important to business plan readers.

Why You Need an Income Statement

In his article, How to Do a Monthly Income Statement Analysis That Fuels Growth , Noah Parsons writes: "In short, you use your income statement to fuel a greater analysis of the financial standing of your business. It helps you identify any top-level issues or opportunities that you can then dive into with forecast scenarios and by looking at elements of your other financial documentation.

Related: How to Make a Balance Sheet

You want to leverage your income statement to understand if you're performing better, worse or as expected. This is done by comparing it to your sales and expense forecasts through a review process known as plan vs actuals comparison. You then update projections to match actual performance to better showcase how your business will net out moving forward."

What Is In an Income Statement

An income statement shows whether you are making any money. It adds up all your revenue from sales and other sources, subtracts all your costs, and comes up with the net income figure, also known as the bottom line.

Related: How to Make a Cash Flow Statement

Income statements are called various names—profit and loss statement (P&L) and earnings statement are two common alternatives. They can get pretty complicated in their attempt to capture sources of income, such as interest, and expenses, such as depreciation. But the basic idea is pretty simple: If you subtract costs from income, what you have left is profit.

To figure out your income statement, you need to gather a bunch of numbers, most of which are easily obtainable. They include your gross revenue, which is made up of sales and any income from interest or sales of assets; your sales, general, and administrative (SG&A) expenses; what you paid out in interest and dividends, if anything; and your corporate tax rate. If you have those, you're ready to go.

Related: Tips and Strategies for Using the Balance Sheet as Your Franchise Scorecard

Sales and Revenue

Revenue is all the income you receive from selling your products or services as well as from other sources such as interest income and sales of assets.

Gross Sales

Your sales figure is the income you receive from selling your product or service. Gross sales equals total sales minus returns. It doesn't include interest or income from sales of assets.

Interest and Dividends

Most businesses have a little reserve fund they keep in an interest-bearing bank or money market account. Income from this fund, as well as from any other interest-paying or dividend-paying securities they own, shows up on the income statement just below the sales figure.

Related: How to Measure Franchise Success With Your Income Statement

Other Income

If you finally decide that the branch office out on County Line Road isn't ever going to turn a decent profit, and you sell the land, building, and fixtures, the income from that sale will show up on your income statement as "other income." Other income may include sales of unused or obsolete equipment or any income-generating activity that's not part of your main line of business.

Costs come in all varieties—that's no secret. You'll record variable costs, such as the cost of goods sold, as well as fixed costs—rent, insurance, maintenance, and so forth. You'll also record costs that are a little trickier, the prime example being depreciation.

Related: How to Use Financial Ratios to Understand the Health of Your Business

Cost of Goods Sold

Cost of goods sold, or COGS, includes expenses associated directly with generating the product or service you're selling. If you buy smartphone components and assemble them, your COGS will include the price of the chips, screen, and other parts, as well as the wages of those doing the assembly. You'll also include supervisor salaries and utilities for your factory. If you're a solo professional service provider, on the other hand, your COGS may amount to little more than whatever salary you pay yourself and whatever technology you may use for your business.

Related: My Company Hears Hundreds of Pitches Every Year — Here's What Investors Are Actually Looking For.

Sales, General, and Administrative Costs

You have some expenses that aren't closely tied to sales volume, including salaries for office personnel, salespeople compensation, rent, insurance, and the like. These are split out from the sales-sensitive COGS figure and included on a separate line.

Depreciation

Depreciation is one of the most baffling pieces of accounting wizardwork. It's a paper loss, a way of subtracting over time the cost of a piece of equipment or a building that lasts many years even though it may get paid for immediately.

Related: 10 Mistakes to Avoid When Pitching Investors (Infographic)

Depreciation isn't an expense that involves cash coming out of your pocket. Yet it's a real expense in an accounting sense, and most income statements will have an entry for depreciation coming off the top of pretax earnings. It refers to an ongoing decrease in asset value.

If you have capital items that you are depreciating, such as an office in your home or a large piece of machinery, your accountant will be able to set up a schedule for depreciation. Each year, you'll take a portion of the purchase price of that item off your earnings statement. Although it hurts profits, depreciation can reduce future taxes.

Paying the interest on loans is another expense that gets a line all to itself and comes out of earnings just before taxes are subtracted. This line doesn't include payments against the principal. Because these payments result in a reduction of liabilities—which we'll talk about in a few pages in connection with your balance sheet—they're not regarded as expenses on the income statement.

Related: How to Craft a Business Plan That Will Turn Investors' Heads

The best thing about taxes is that they're figured last, on the profits that are left after every other thing has been taken out. Tax rates vary widely according to where your company is located, how and whether state and local taxes are figured, and your special tax situation. Use previous years as a guidepost for future returns. If you are just opening your business, work carefully with your accountant to set up a system whereby you can pay the necessary taxes at regular intervals.

Buzzword: EBIT

EBIT stands for earnings before interest and taxes. It is an indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest.

Related: Don't Make This Huge Mistake on Your Financial Model

Important Plan Note

Don't confuse sales with receipts. Your sales figure represents sales booked during the period, not necessarily money received. If your customers buy now and pay later, there may be a significant difference between sales and cash receipts.

More in Write Your Business Plan

Section 1: the foundation of a business plan, section 2: putting your business plan to work, section 3: selling your product and team, section 4: marketing your business plan, section 5: organizing operations and finances, section 6: getting your business plan to investors.

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Tim berry on business planning, starting and growing your business, and having a life in the meantime., standard business plan financials: projected profit and loss.

Continuing with my series here on standard business plan financials, all taken from my Lean Business Planning site, the Profit and Loss, also called Income Statement, is probably the most standard of all financial statements. And the projected profit and loss, or projected income (or pro-forma profit and loss or pro-forma income) is also the most standard of the financial projections in a business plan.

• It starts with Sales, which is why business people who like buzzwords will sometimes refer to sales as “the top line.”
• It then shows Direct Costs (or COGS, or Unit Costs).
• Then Gross Margin, Sales less Direct Costs.
• Then operating expenses.
• Gross margin less operating expenses is gross profit, also called EBITDA for “earnings before interest, taxes, depreciation and amortization.” I use EBITDA instead of the more traditional EBIT (earnings before interest and taxes). I explained that choice and depreciation and amortization as well in Financial Projection Tips and Traps , in the previous section.
• Then it shows depreciation, interest expenses, and then taxes…
• Then, at the very bottom, Net Profit; this is why so many people refer to net profit as “the bottom line,” which has also come to mean the conclusion, or main point, in a discussion.

The following illustration shows a simple Projected Profit and Loss for the bicycle store I’ve been using as an example. This example doesn’t divide operating expenses into categories. The format and math start with sales at the top. You’ll find that same basic layout in everything from small business accounting statements to the financial disclosures of large enterprises whose stock is traded on public markets. Companies vary widely on how much detail they include. And projections are always different from statements, because of Planning not accounting . But still this is standard.

A lean business plan will normally include sales, costs of sales, and expenses. To take it from there to a more formal projected Profit and Loss is a matter of collecting forecasts from the lean plan. The sales and costs of sales go at the top, then operating expenses. Calculating net profit is simple math.

Keep your assumptions simple. Remember our principle about planning and accounting. Don’t try to calculate interest based on a complex series of debt instruments; just average your interest over the projected debt. Don’t try to do graduated tax rates; use an average tax percentage for a profitable company.

Notice that the Profit and Loss involves only four of the Six Key Financial Terms . While a Profit and Loss Statement or Projected Profit and Loss affects the Balance Sheet because earnings are part of capital, it includes only sales, costs, expenses, and profit.

Hi, In case of bank financing for machineries and working capital, how can it be broken down in to the expense stream? ( capital + interest)

When you spend on assets is not deductible from income, and is therefore not an expense. What you spent to repay the principle of a loan is not deductible, and therefore not an expense. The interest on a loan is deductible, and is an expense.

Excuse me, may I know if the project profit & loss should plan for the first year only or for year 1-3 in business plan of a new company?

Kattie Wan, I recommend for normal cases the projected profit and loss monthly for the first 12 months, and two years annually after that. There are always special cases, though; every business is different.

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• Business Planning

Business Plan Financial Projections

Written by Dave Lavinsky

Financial projections are forecasted analyses of your business’ future that include income statements, balance sheets and cash flow statements. We have found them to be an crucial part of your business plan for the following reasons:

• They can help prove or disprove the viability of your business idea. For example, if your initial projections show your company will never make a sizable profit, your venture might not be feasible. Or, in such a case, you might figure out ways to raise prices, enter new markets, or streamline operations to make it profitable. 
• Financial projections give investors and lenders an idea of how well your business is likely to do in the future. They can give lenders the confidence that you’ll be able to comfortably repay their loan with interest. And for equity investors, your projections can give them faith that you’ll earn them a solid return on investment. In both cases, your projections can help you secure the funding you need to launch or grow your business.
• Financial projections help you track your progress over time and ensure your business is on track to meet its goals. For example, if your financial projections show you should generate $500,000 in sales during the year, but you are not on track to accomplish that, you’ll know you need to take corrective action to achieve your goal.

Below you’ll learn more about the key components of financial projections and how to complete and include them in your business plan.

What Are Business Plan Financial Projections?

Financial projections are an estimate of your company’s future financial performance through financial forecasting. They are typically used by businesses to secure funding, but can also be useful for internal decision-making and planning purposes. There are three main financial statements that you will need to include in your business plan financial projections:

1. Income Statement Projection

The income statement projection is a forecast of your company’s future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.

There are a few key items you will need to include in your projection:

• Revenue: Your revenue projection should break down your expected sales by product or service, as well as by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Expenses: Your expense projection should include a breakdown of your expected costs by category, such as marketing, salaries, and rent. Again, it is important to be realistic in your estimates.
• Net Income: The net income projection is the difference between your revenue and expenses. This number tells you how much profit your company is expected to make.

Sample Income Statement

2. Cash Flow Statement & Projection

The cash flow statement and projection are a forecast of your company’s future cash inflows and outflows. It is important to include a cash flow projection in your business plan, as it will give investors and lenders an idea of your company’s ability to generate cash.

There are a few key items you will need to include in your cash flow projection:

• The cash flow statement shows a breakdown of your expected cash inflows and outflows by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Cash inflows should include items such as sales revenue, interest income, and capital gains. Cash outflows should include items such as salaries, rent, and marketing expenses.
• It is important to track your company’s cash flow over time to ensure that it is healthy. A healthy cash flow is necessary for a successful business.

Sample Cash Flow Statements

3. Balance Sheet Projection

The balance sheet projection is a forecast of your company’s future financial position. It should include line items for each type of asset and liability, as well as a total at the end.

A projection should include a breakdown of your company’s assets and liabilities by category. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.

It is important to track your company’s financial position over time to ensure that it is healthy. A healthy balance is necessary for a successful business.

Sample Balance Sheet

How to Create Financial Projections

Creating financial projections for your business plan can be a daunting task, but it’s important to put together accurate and realistic financial projections in order to give your business the best chance for success.  

Cost Assumptions

When you create financial projections, it is important to be realistic about the costs your business will incur, using historical financial data can help with this. You will need to make assumptions about the cost of goods sold, operational costs, and capital expenditures.

It is important to track your company’s expenses over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.

Capital Expenditures, Funding, Tax, and Balance Sheet Items

You will also need to make assumptions about capital expenditures, funding, tax, and balance sheet items. These assumptions will help you to create a realistic financial picture of your business.

Capital Expenditures

When projecting your company’s capital expenditures, you will need to make a number of assumptions about the type of equipment or property your business will purchase. You will also need to estimate the cost of the purchase.

When projecting your company’s funding needs, you will need to make a number of assumptions about where the money will come from. This might include assumptions about bank loans, venture capital, or angel investors.

When projecting your company’s tax liability, you will need to make a number of assumptions about the tax rates that will apply to your business. You will also need to estimate the amount of taxes your company will owe.

Balance Sheet Items

When projecting your company’s balance, you will need to make a number of assumptions about the type and amount of debt your business will have. You will also need to estimate the value of your company’s assets and liabilities.

Financial Projection Scenarios

Write two financial scenarios when creating your financial projections, a best-case scenario, and a worst-case scenario. Use your list of assumptions to come up with realistic numbers for each scenario.

Presuming that you have already generated a list of assumptions, the creation of best and worst-case scenarios should be relatively simple. For each assumption, generate a high and low estimate. For example, if you are assuming that your company will have $100,000 in revenue, your high estimate might be $120,000 and your low estimate might be $80,000.

Once you have generated high and low estimates for all of your assumptions, you can create two scenarios: a best case scenario and a worst-case scenario. Simply plug the high estimates into your financial projections for the best-case scenario and the low estimates into your financial projections for the worst-case scenario.

Conduct a Ratio Analysis

A ratio analysis is a useful tool that can be used to evaluate a company’s financial health. Ratios can be used to compare a company’s performance to its industry average or to its own historical performance.

There are a number of different ratios that can be used in ratio analysis. Some of the more popular ones include the following:

• Gross margin ratio
• Operating margin ratio
• Return on assets (ROA)
• Return on equity (ROE)

To conduct a ratio analysis, you will need financial statements for your company and for its competitors. You will also need industry average ratios. These can be found in industry reports or on financial websites.

Once you have the necessary information, you can calculate the ratios for your company and compare them to the industry averages or to your own historical performance. If your company’s ratios are significantly different from the industry averages, it might be indicative of a problem.

Be Realistic

When creating your financial projections, it is important to be realistic. Your projections should be based on your list of assumptions and should reflect your best estimate of what your company’s future financial performance will be. This includes projected operating income, a projected income statement, and a profit and loss statement.

Your goal should be to create a realistic set of financial projections that can be used to guide your company’s future decision-making.

Sales Forecast

One of the most important aspects of your financial projections is your sales forecast. Your sales forecast should be based on your list of assumptions and should reflect your best estimate of what your company’s future sales will be.

Your sales forecast should be realistic and achievable. Do not try to “game” the system by creating an overly optimistic or pessimistic forecast. Your goal should be to create a realistic sales forecast that can be used to guide your company’s future decision-making.

Creating a sales forecast is not an exact science, but there are a number of methods that can be used to generate realistic estimates. Some common methods include market analysis, competitor analysis, and customer surveys.

Create Multi-Year Financial Projections

When creating financial projections, it is important to generate projections for multiple years. This will give you a better sense of how your company’s financial performance is likely to change over time.

It is also important to remember that your financial projections are just that: projections. They are based on a number of assumptions and are not guaranteed to be accurate. As such, you should review and update your projections on a regular basis to ensure that they remain relevant.

Creating financial projections is an important part of any business plan. However, it’s important to remember that these projections are just estimates. They are not guarantees of future success.

Business Plan Financial Projections FAQs

What is a business plan financial projection.

A business plan financial projection is a forecast of your company's future financial performance. It should include line items for each type of asset and liability, as well as a total at the end.

What are annual income statements? 

The Annual income statement is a financial document and a financial model that summarize a company's revenues and expenses over the course of a fiscal year. They provide a snapshot of a company's financial health and performance and can be used to track trends and make comparisons with other businesses.

What are the necessary financial statements?

The necessary financial statements for a business plan are an income statement, cash flow statement, and balance sheet.

How do I create financial projections?

You can create financial projections by making a list of assumptions, creating two scenarios (best case and worst case), conducting a ratio analysis, and being realistic.

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How To Create Financial Projections for Your Business Plan

Building a financial projection as you write out your business plan can help you forecast how much money your business will bring in.

Planning for the future, whether it’s with growth in mind or just staying the course, is central to being a business owner. Part of this planning effort is making financial projections of sales, expenses, and—if all goes well—profits.

Even if your business is a startup that has yet to open its doors, you can still make projections. Here’s how to prepare your business plan financial projections, so your company will thrive.

What are business plan financial projections?

Business plan financial projections are a company’s estimates, or forecasts, of its financial performance at some point in the future. For existing businesses, draw on historical data to detail how your company expects metrics like revenue, expenses, profit, and cash flow to change over time.

Companies can create financial projections for any span of time, but typically they’re for between one and five years. Many companies revisit and amend these projections at least annually. 

Creating financial projections is an important part of building a business plan . That’s because realistic estimates help company leaders set business goals, execute financial decisions, manage cash flow , identify areas for operational improvement, seek funding from investors, and more.

What are financial projections used for? 

Financial forecasting serves as a useful tool for key stakeholders, both within and outside of the business. They often are used for:

Business planning

Accurate financial projections can help a company establish growth targets and other goals . They’re also used to determine whether ideas like a new product line are financially feasible. Future financial estimates are helpful tools for business contingency planning, which involves considering the monetary impact of adverse events and worst-case scenarios. They also provide a benchmark: If revenue is falling short of projections, for example, the company may need changes to keep business operations on track.

Projections may reveal potential problems—say, unexpected operating expenses that exceed cash inflows. A negative cash flow projection may suggest the business needs to secure funding through outside investments or bank loans, increase sales, improve margins, or cut costs.

When potential investors consider putting their money into a venture, they want a return on that investment. Business projections are a key tool they will use to make that decision. The projections can figure in establishing the valuation of your business, equity stakes, plans for an exit, and more. Investors may also use your projections to ensure that the business is meeting goals and benchmarks.

Loans or lines of credit 

Lenders rely on financial projections to determine whether to extend a business loan to your company. They’ll want to see historical financial data like cash flow statements, your balance sheet , and other financial statements—but they’ll also look very closely at your multi-year financial projections. Good candidates can receive higher loan amounts with lower interest rates or more flexible payment plans.

Lenders may also use the estimated value of company assets to determine the collateral to secure the loan. Like investors, lenders typically refer to your projections over time to monitor progress and financial health.

What information is included in financial projections for a business?

Before sitting down to create projections, you’ll need to collect some data. Owners of an existing business can leverage three financial statements they likely already have: a balance sheet, an annual income statement , and a cash flow statement .

A new business, however, won’t have this historical data. So market research is crucial: Review competitors’ pricing strategies, scour research reports and market analysis , and scrutinize any other publicly available data that can help inform your projections. Beginning with conservative estimates and simple calculations can help you get started, and you can always add to the projections over time.

One business’s financial projections may be more detailed than another’s, but the forecasts typically rely on and include the following:

True to its name, a cash flow statement shows the money coming into and going out of the business over time: cash outflows and inflows. Cash flows fall into three main categories:

Income statement

Projected income statements, also known as projected profit and loss statements (P&Ls), forecast the company’s revenue and expenses for a given period.

Generally, this is a table with several line items for each category. Sales projections can include the sales forecast for each individual product or service (many companies break this down by month). Expenses are a similar setup: List your expected costs by category, including recurring expenses such as salaries and rent, as well as variable expenses for raw materials and transportation.

This exercise will also provide you with a net income projection, which is the difference between your revenue and expenses, including any taxes or interest payments. That number is a forecast of your profit or loss, hence why this document is often called a P&L.

Balance sheet

A balance sheet shows a snapshot of your company’s financial position at a specific point in time. Three important elements are included as balance sheet items:

• Assets. Assets are any tangible item of value that the company currently has on hand or will in the future, like cash, inventory, equipment, and accounts receivable. Intangible assets include copyrights, trademarks, patents and other intellectual property .
• Liabilities. Liabilities are anything that the company owes, including taxes, wages, accounts payable, dividends, and unearned revenue, such as customer payments for goods you haven’t yet delivered.
• Shareholder equity. The shareholder equity figure is derived by subtracting total liabilities from total assets. It reflects how much money, or capital, the company would have left over if the business paid all its liabilities at once or liquidated (this figure can be a negative number if liabilities exceed assets). Equity in business is the amount of capital that the owners and any other shareholders have tied up in the company.

They’re called balance sheets because assets always equal liabilities plus shareholder equity. 

5 steps for creating financial projections for your business

• Identify the purpose and timeframe for your projections
• Collect relevant historical financial data and market analysis
• Forecast expenses
• Forecast sales
• Build financial projections

The following five steps can help you break down the process of developing financial projections for your company:

1. Identify the purpose and timeframe for your projections

The details of your projections may vary depending on their purpose. Are they for internal planning, pitching investors, or monitoring performance over time? Setting the time frame—monthly, quarterly, annually, or multi-year—will also inform the rest of the steps.

2. Collect relevant historical financial data and market analysis

If available, gather historical financial statements, including balance sheets, cash flow statements, and annual income statements. New companies without this historical data may have to rely on market research, analyst reports, and industry benchmarks—all things that established companies also should use to support their assumptions.

3. Forecast expenses

Identify future spending based on direct costs of producing your goods and services ( cost of goods sold, or COGS) as well as operating expenses, including any recurring and one-time costs. Factor in expected changes in expenses, because this can evolve based on business growth, time in the market, and the launch of new products.

4. Forecast sales

Project sales for each revenue stream, broken down by month. These projections may be based on historical data or market research, and they should account for anticipated or likely changes in market demand and pricing.

5. Build financial projections

Now that you have projected expenses and revenue, you can plug that information into Shopify’s cash flow calculator and cash flow statement template . This information can also be used to forecast your income statement. In turn, these steps inform your calculations on the balance sheet, on which you’ll also account for any assets and liabilities .

Business plan financial projections FAQ

What are the main components of a financial projection in a business plan.

Generally speaking, most financial forecasts include projections for income, balance sheet, and cash flow.

What’s the difference between financial projection and financial forecast?

These two terms are often used interchangeably. Depending on the context, a financial forecast may refer to a more formal and detailed document—one that might include analysis and context for several financial metrics in a more complex financial model.

Do I need accounting or planning software for financial projections?

Not necessarily. Depending on factors like the age and size of your business, you may be able to prepare financial projections using a simple spreadsheet program. Large complicated businesses, however, usually use accounting software and other types of advanced data-management systems.

What are some limitations of financial projections?

Projections are by nature based on human assumptions and, of course, humans can’t truly predict the future—even with the aid of computers and software programs. Financial projections are, at best, estimates based on the information available at the time—not ironclad guarantees of future performance.

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Start » startup, business plan financials: 3 statements to include.

The finance section of your business plan is essential to securing investors and determining whether your idea is even viable. Here's what to include.

If your business plan is the blueprint of how to run your company, the financials section is the key to making it happen. The finance section of your business plan is essential to determining whether your idea is even viable in the long term. It’s also necessary to convince investors of this viability and subsequently secure the type and amount of funding you need. Here’s what to include in your business plan financials.

[Read: How to Write a One-Page Business Plan ]

What are business plan financials?

Business plan financials is the section of your business plan that outlines your past, current and projected financial state. This section includes all the numbers and hard data you’ll need to plan for your business’s future, and to make your case to potential investors. You will need to include supporting financial documents and any funding requests in this part of your business plan.

Business plan financials are vital because they allow you to budget for existing or future expenses, as well as forecast your business’s future finances. A strongly written finance section also helps you obtain necessary funding from investors, allowing you to grow your business.

Sections to include in your business plan financials

Here are the three statements to include in the finance section of your business plan:

Profit and loss statement

A profit and loss statement , also known as an income statement, identifies your business’s revenue (profit) and expenses (loss). This document describes your company’s overall financial health in a given time period. While profit and loss statements are typically prepared quarterly, you will need to do so at least annually before filing your business tax return with the IRS.

Common items to include on a profit and loss statement :

• Revenue: total sales and refunds, including any money gained from selling property or equipment.
• Expenditures: total expenses.
• Cost of goods sold (COGS): the cost of making products, including materials and time.
• Gross margin: revenue minus COGS.
• Operational expenditures (OPEX): the cost of running your business, including paying employees, rent, equipment and travel expenses.
• Depreciation: any loss of value over time, such as with equipment.
• Earnings before tax (EBT): revenue minus COGS, OPEX, interest, loan payments and depreciation.
• Profit: revenue minus all of your expenses.

Businesses that have not yet started should provide projected income statements in their financials section. Currently operational businesses should include past and present income statements, in addition to any future projections.

[Read: Top Small Business Planning Strategies ]

A strongly written finance section also helps you obtain necessary funding from investors, allowing you to grow your business.

Balance sheet

A balance sheet provides a snapshot of your company’s finances, allowing you to keep track of earnings and expenses. It includes what your business owns (assets) versus what it owes (liabilities), as well as how much your business is currently worth (equity).

On the assets side of your balance sheet, you will have three subsections: current assets, fixed assets and other assets. Current assets include cash or its equivalent value, while fixed assets refer to long-term investments like equipment or buildings. Any assets that do not fall within these categories, such as patents and copyrights, can be classified as other assets.

On the liabilities side of your balance sheet, include a total of what your business owes. These can be broken down into two parts: current liabilities (amounts to be paid within a year) and long-term liabilities (amounts due for longer than a year, including mortgages and employee benefits).

Once you’ve calculated your assets and liabilities, you can determine your business’s net worth, also known as equity. This can be calculated by subtracting what you owe from what you own, or assets minus liabilities.

Cash flow statement

A cash flow statement shows the exact amount of money coming into your business (inflow) and going out of it (outflow). Each cost incurred or amount earned should be documented on its own line, and categorized into one of the following three categories: operating activities, investment activities and financing activities. These three categories can all have inflow and outflow activities.

Operating activities involve any ongoing expenses necessary for day-to-day operations; these are likely to make up the majority of your cash flow statement. Investment activities, on the other hand, cover any long-term payments that are needed to start and run your business. Finally, financing activities include the money you’ve used to fund your business venture, including transactions with creditors or funders.

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How to Write the Financial Section of a Business Plan

An outline of your company's growth strategy is essential to a business plan, but it just isn't complete without the numbers to back it up. here's some advice on how to include things like a sales forecast, expense budget, and cash-flow statement..

A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line. You do this in a distinct section of your business plan for financial forecasts and statements. The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business. "This is what will tell you whether the business will be viable or whether you are wasting your time and/or money," says Linda Pinson, author of Automate Your Business Plan for Windows  (Out of Your Mind 2008) and Anatomy of a Business Plan (Out of Your Mind 2008), who runs a publishing and software business Out of Your Mind and Into the Marketplace . "In many instances, it will tell you that you should not be going into this business." The following will cover what the financial section of a business plan is, what it should include, and how you should use it to not only win financing but to better manage your business.

Dig Deeper: Generating an Accurate Sales Forecast

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How to Write the Financial Section of a Business Plan: The Purpose of the Financial Section Let's start by explaining what the financial section of a business plan is not. Realize that the financial section is not the same as accounting. Many people get confused about this because the financial projections that you include--profit and loss, balance sheet, and cash flow--look similar to accounting statements your business generates. But accounting looks back in time, starting today and taking a historical view. Business planning or forecasting is a forward-looking view, starting today and going into the future. "You don't do financials in a business plan the same way you calculate the details in your accounting reports," says Tim Berry, president and founder of Palo Alto Software, who blogs at Bplans.com and is writing a book, The Plan-As-You-Go Business Plan. "It's not tax reporting. It's an elaborate educated guess." What this means, says Berry, is that you summarize and aggregate more than you might with accounting, which deals more in detail. "You don't have to imagine all future asset purchases with hypothetical dates and hypothetical depreciation schedules to estimate future depreciation," he says. "You can just guess based on past results. And you don't spend a lot of time on minute details in a financial forecast that depends on an educated guess for sales." The purpose of the financial section of a business plan is two-fold. You're going to need it if you are seeking investment from venture capitalists, angel investors, or even smart family members. They are going to want to see numbers that say your business will grow--and quickly--and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan. But the most important reason to compile this financial forecast is for your own benefit, so you understand how you project your business will do. "This is an ongoing, living document. It should be a guide to running your business," Pinson says. "And at any particular time you feel you need funding or financing, then you are prepared to go with your documents." If there is a rule of thumb when filling in the numbers in the financial section of your business plan, it's this: Be realistic. "There is a tremendous problem with the hockey-stick forecast" that projects growth as steady until it shoots up like the end of a hockey stick, Berry says. "They really aren't credible." Berry, who acts as an angel investor with the Willamette Angel Conference, says that while a startling growth trajectory is something that would-be investors would love to see, it's most often not a believable growth forecast. "Everyone wants to get involved in the next Google or Twitter, but every plan seems to have this hockey stick forecast," he says. "Sales are going along flat, but six months from now there is a huge turn and everything gets amazing, assuming they get the investors' money."  The way you come up a credible financial section for your business plan is to demonstrate that it's realistic. One way, Berry says, is to break the figures into components, by sales channel or target market segment, and provide realistic estimates for sales and revenue. "It's not exactly data, because you're still guessing the future. But if you break the guess into component guesses and look at each one individually, it somehow feels better," Berry says. "Nobody wins by overly optimistic or overly pessimistic forecasts."

Dig Deeper: What Angel Investors Look For

How to Write the Financial Section of a Business Plan: The Components of a Financial Section

A financial forecast isn't necessarily compiled in sequence. And you most likely won't present it in the final document in the same sequence you compile the figures and documents. Berry says that it's typical to start in one place and jump back and forth. For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses.  Still, he says that it's easier to explain in sequence, as long as you understand that you don't start at step one and go to step six without looking back--a lot--in between.

• Start with a sales forecast. Set up a spreadsheet projecting your sales over the course of three years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years. "Ideally you want to project in spreadsheet blocks that include one block for unit sales, one block for pricing, a third block that multiplies units times price to calculate sales, a fourth block that has unit costs, and a fifth that multiplies units times unit cost to calculate cost of sales (also called COGS or direct costs)," Berry says. "Why do you want cost of sales in a sales forecast? Because you want to calculate gross margin. Gross margin is sales less cost of sales, and it's a useful number for comparing with different standard industry ratios." If it's a new product or a new line of business, you have to make an educated guess. The best way to do that, Berry says, is to look at past results.
• Create an expenses budget. You're going to need to understand how much it's going to cost you to actually make the sales you have forecast. Berry likes to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses), because it's a good thing for a business to know. "Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Berry says. "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such." Once again, this is a forecast, not accounting, and you're going to have to estimate things like interest and taxes. Berry recommends you go with simple math. He says multiply estimated profits times your best-guess tax percentage rate to estimate taxes. And then multiply your estimated debts balance times an estimated interest rate to estimate interest.
• Develop a cash-flow statement. This is the statement that shows physical dollars moving in and out of the business. "Cash flow is king," Pinson says. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents, such as profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months. Pinson says that it's important to understand when compiling this cash-flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. You don't want to be surprised that you only collect 80 percent of your invoices in the first 30 days when you are counting on 100 percent to pay your expenses, she says. Some business planning software programs will have these formulas built in to help you make these projections.
• Income projections. This is your pro forma profit and loss statement, detailing forecasts for your business for the coming three years. Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest, and taxes, is net profit."
• Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren't in the profits and loss statement and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like startup assets. A lot are not obvious. "Interest is in the profit and loss, but repayment of principle isn't," Berry says. "Taking out a loan, giving out a loan, and inventory show up only in assets--until you pay for them." So the way to compile this is to start with assets, and estimate what you'll have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure out what you have as liabilities--meaning debts. That's money you owe because you haven't paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
• Breakeven analysis. The breakeven point, Pinson says, is when your business's expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. "If your business is viable, at a certain period of time your overall revenue will exceed your overall expenses, including interest." This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.

Dig Deeper: How to Price Business Services

How to Write the Financial Section of a Business Plan: How to Use the Financial Section One of the biggest mistakes business people make is to look at their business plan, and particularly the financial section, only once a year. "I like to quote former President Dwight D. Eisenhower," says Berry. "'The plan is useless, but planning is essential.' What people do wrong is focus on the plan, and once the plan is done, it's forgotten. It's really a shame, because they could have used it as a tool for managing the company." In fact, Berry recommends that business executives sit down with the business plan once a month and fill in the actual numbers in the profit and loss statement and compare those numbers with projections. And then use those comparisons to revise projections in the future. Pinson also recommends that you undertake a financial statement analysis to develop a study of relationships and compare items in your financial statements, compare financial statements over time, and even compare your statements to those of other businesses. Part of this is a ratio analysis. She recommends you do some homework and find out some of the prevailing ratios used in your industry for liquidity analysis, profitability analysis, and debt and compare those standard ratios with your own. "This is all for your benefit," she says. "That's what financial statements are for. You should be utilizing your financial statements to measure your business against what you did in prior years or to measure your business against another business like yours."  If you are using your business plan to attract investment or get a loan, you may also include a business financial history as part of the financial section. This is a summary of your business from its start to the present. Sometimes a bank might have a section like this on a loan application. If you are seeking a loan, you may need to add supplementary documents to the financial section, such as the owner's financial statements, listing assets and liabilities. All of the various calculations you need to assemble the financial section of a business plan are a good reason to look for business planning software, so you can have this on your computer and make sure you get this right. Software programs also let you use some of your projections in the financial section to create pie charts or bar graphs that you can use elsewhere in your business plan to highlight your financials, your sales history, or your projected income over three years. "It's a pretty well-known fact that if you are going to seek equity investment from venture capitalists or angel investors," Pinson says, "they do like visuals."

Dig Deeper: How to Protect Your Margins in a Downturn

Related Links: Making It All Add Up: The Financial Section of a Business Plan One of the major benefits of creating a business plan is that it forces entrepreneurs to confront their company's finances squarely. Persuasive Projections You can avoid some of the most common mistakes by following this list of dos and don'ts. Making Your Financials Add Up No business plan is complete until it contains a set of financial projections that are not only inspiring but also logical and defensible. How many years should my financial projections cover for a new business? Some guidelines on what to include. Recommended Resources: Bplans.com More than 100 free sample business plans, plus articles, tips, and tools for developing your plan. Planning, Startups, Stories: Basic Business Numbers An online video in author Tim Berry's blog, outlining what you really need to know about basic business numbers. Out of Your Mind and Into the Marketplace Linda Pinson's business selling books and software for business planning. Palo Alto Software Business-planning tools and information from the maker of the Business Plan Pro software. U.S. Small Business Administration Government-sponsored website aiding small and midsize businesses. Financial Statement Section of a Business Plan for Start-Ups A guide to writing the financial section of a business plan developed by SCORE of northeastern Massachusetts.

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Financial Projections for Your Business Plan

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Business Plan Example and Template

Learn how to create a business plan

What is a Business Plan?

A business plan is a document that contains the operational and financial plan of a business, and details how its objectives will be achieved. It serves as a road map for the business and can be used when pitching investors or financial institutions for debt or equity financing .

A business plan should follow a standard format and contain all the important business plan elements. Typically, it should present whatever information an investor or financial institution expects to see before providing financing to a business.

Contents of a Business Plan

A business plan should be structured in a way that it contains all the important information that investors are looking for. Here are the main sections of a business plan:

1. Title Page

The title page captures the legal information of the business, which includes the registered business name, physical address, phone number, email address, date, and the company logo.

2. Executive Summary

The executive summary is the most important section because it is the first section that investors and bankers see when they open the business plan. It provides a summary of the entire business plan. It should be written last to ensure that you don’t leave any details out. It must be short and to the point, and it should capture the reader’s attention. The executive summary should not exceed two pages.

3. Industry Overview

The industry overview section provides information about the specific industry that the business operates in. Some of the information provided in this section includes major competitors, industry trends, and estimated revenues. It also shows the company’s position in the industry and how it will compete in the market against other major players.

4. Market Analysis and Competition

The market analysis section details the target market for the company’s product offerings. This section confirms that the company understands the market and that it has already analyzed the existing market to determine that there is adequate demand to support its proposed business model.

Market analysis includes information about the target market’s demographics , geographical location, consumer behavior, and market needs. The company can present numbers and sources to give an overview of the target market size.

A business can choose to consolidate the market analysis and competition analysis into one section or present them as two separate sections.

5. Sales and Marketing Plan

The sales and marketing plan details how the company plans to sell its products to the target market. It attempts to present the business’s unique selling proposition and the channels it will use to sell its goods and services. It details the company’s advertising and promotion activities, pricing strategy, sales and distribution methods, and after-sales support.

6. Management Plan

The management plan provides an outline of the company’s legal structure, its management team, and internal and external human resource requirements. It should list the number of employees that will be needed and the remuneration to be paid to each of the employees.

Any external professionals, such as lawyers, valuers, architects, and consultants, that the company will need should also be included. If the company intends to use the business plan to source funding from investors, it should list the members of the executive team, as well as the members of the advisory board.

7. Operating Plan

The operating plan provides an overview of the company’s physical requirements, such as office space, machinery, labor, supplies, and inventory . For a business that requires custom warehouses and specialized equipment, the operating plan will be more detailed, as compared to, say, a home-based consulting business. If the business plan is for a manufacturing company, it will include information on raw material requirements and the supply chain.

8. Financial Plan

The financial plan is an important section that will often determine whether the business will obtain required financing from financial institutions, investors, or venture capitalists. It should demonstrate that the proposed business is viable and will return enough revenues to be able to meet its financial obligations. Some of the information contained in the financial plan includes a projected income statement , balance sheet, and cash flow.

9. Appendices and Exhibits

The appendices and exhibits part is the last section of a business plan. It includes any additional information that banks and investors may be interested in or that adds credibility to the business. Some of the information that may be included in the appendices section includes office/building plans, detailed market research , products/services offering information, marketing brochures, and credit histories of the promoters.

Business Plan Template

Here is a basic template that any business can use when developing its business plan:

Section 1: Executive Summary

• Present the company’s mission.
• Describe the company’s product and/or service offerings.
• Give a summary of the target market and its demographics.
• Summarize the industry competition and how the company will capture a share of the available market.
• Give a summary of the operational plan, such as inventory, office and labor, and equipment requirements.

Section 2: Industry Overview

• Describe the company’s position in the industry.
• Describe the existing competition and the major players in the industry.
• Provide information about the industry that the business will operate in, estimated revenues, industry trends, government influences, as well as the demographics of the target market.

Section 3: Market Analysis and Competition

• Define your target market, their needs, and their geographical location.
• Describe the size of the market, the units of the company’s products that potential customers may buy, and the market changes that may occur due to overall economic changes.
• Give an overview of the estimated sales volume vis-à-vis what competitors sell.
• Give a plan on how the company plans to combat the existing competition to gain and retain market share.

Section 4: Sales and Marketing Plan

• Describe the products that the company will offer for sale and its unique selling proposition.
• List the different advertising platforms that the business will use to get its message to customers.
• Describe how the business plans to price its products in a way that allows it to make a profit.
• Give details on how the company’s products will be distributed to the target market and the shipping method.

Section 5: Management Plan

• Describe the organizational structure of the company.
• List the owners of the company and their ownership percentages.
• List the key executives, their roles, and remuneration.
• List any internal and external professionals that the company plans to hire, and how they will be compensated.
• Include a list of the members of the advisory board, if available.

Section 6: Operating Plan

• Describe the location of the business, including office and warehouse requirements.
• Describe the labor requirement of the company. Outline the number of staff that the company needs, their roles, skills training needed, and employee tenures (full-time or part-time).
• Describe the manufacturing process, and the time it will take to produce one unit of a product.
• Describe the equipment and machinery requirements, and if the company will lease or purchase equipment and machinery, and the related costs that the company estimates it will incur.
• Provide a list of raw material requirements, how they will be sourced, and the main suppliers that will supply the required inputs.

Section 7: Financial Plan

• Describe the financial projections of the company, by including the projected income statement, projected cash flow statement, and the balance sheet projection.

Section 8: Appendices and Exhibits

• Quotes of building and machinery leases
• Proposed office and warehouse plan
• Market research and a summary of the target market
• Credit information of the owners
• List of product and/or services

Related Readings

Thank you for reading CFI’s guide to Business Plans. To keep learning and advancing your career, the following CFI resources will be helpful:

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• Three Financial Statements
• Business Model Canvas Examples
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Sample Business Plan Income Statement

Business plans kit for dummies.

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An income statement summarizes your revenue and costs and shows your net profit in your business plan. Take a look at how a gift shop called Broad Street Emporium uses income statements to manage business finances. The figure shows the company’s annual revenues, costs, and profits for the most recent year as well as for the previous year. By comparing statements for two years in a row, the owners can see how their financial performance has changed over time.

The Broad Street Emporium income statement includes five sections. Each one provides important information about the company’s financial condition.

Income Statement Section 1: Gross revenue

The word “gross” has nothing to do with teenage jargon. In business finance, gross revenue refers to the total of all sales income collected by your business without subtracting any costs.

In the case of Broad Street Emporium, gross revenue comes from two major sources: money taken in via in-store retail sales and money collected through the store’s catalog sales.

Depending on your business, your revenue may come from sales of a single product or product line or from a number of different products and services. If you have more than one revenue stream, itemize revenues from each source so that you can see at a glance where your revenue is really coming from and then add the categories to arrive at your gross revenue.

Income Statement Section 2: Gross profit

In general, profit is the money that you get to keep after all the bills are paid.

Gross profit, also called gross income, is the first stage of profit. It equals gross revenue minus the costs of goods sold, which covers the costs directly associated with producing, assembling, or purchasing what you have to sell.

To Broad Street Emporium, costs of goods sold include the wholesale costs of the merchandise displayed on the gift shop’s shelves and in its catalog. To a service business, costs of goods sold include costs directly related to supplying or delivering the service. To a manufacturer, costs of goods sold include costs for raw materials and the labor, utilities, and facilities needed to put the product together.

You’ll have to make judgment calls regarding which expenses count as costs of goods. After you decide, keep your definition consistent over time so that as you monitor gross profit, you’re able to compare apples with apples.

Income Statement Section 3: Operating profit

After you have subtracted your costs of goods from your gross revenue to arrive at your gross profit, the next step is to calculate your operating profit, which involves several steps.

First you have to subtract from your gross profit your operating expenses , also known as general and administrative expenses or SG&A (sales, general, and administration) expenses. Under any name, these expenses include the costs involved in operating your business, including salaries, research and development costs, marketing expenses, travel and entertainment, utility bills, rent, office supplies, and other overhead expenses.

Next you need to account for something called depreciation expenses . When you purchase big-ticket items for your business — maybe a car to call on clients, a computer system, or even a building for offices, warehouse space, or other facilities — what you’re really doing is exchanging one asset (cash in the bank) for another asset (the car, computer, or building).

The business assets you acquire all have useful life spans, so one way to spread out the costs of these assets over the number of years they’re actually in service is to calculate and deduct depreciation expenses each year.

To calculate your operating profit (you might also hear it called operating income or EBIT, which stands for earnings before interest and taxes), you subtract your operating and depreciation expenses from your gross profit:

Operating profit = Gross profit @@ms Operating expenses and Depreciation expenses

On the example Broad Street Emporium income statement, operating expenses reflect staff salaries, advertising costs, and production and delivery of the store’s catalog three times a year. In addition, the company takes depreciation expenses for its storefront building, computer system, and delivery van.

Watch your overhead expenses like a hawk. They’re not tied directly to your products and services, so they don’t contribute directly to your revenue. But if they get out of line, they can quickly eat away at your gross profits.

Income Statement Section 4: Profit before taxes

Profit before taxes takes into account any income that your company made on investments of any sort and subtracts any interest expenses you paid over the statement period.

Profit before taxes = Operating profit + Investment income @@ms Interest expenses

The reason that you keep investment income and interest expenses outside your operating profit is because they result from money management and aren’t really part of your business operations. For one thing, the amount of interest you pay depends on how you’ve structured your company financially, not on the business itself. For another thing, interest absolutely, positively has to be paid on a strict and unforgiving schedule.

Income Statement Section 5: Net profit

Net profit (also called net earnings, net income, or bottom line) is what’s left after you subtract your final expenses from your total business income. As you read that sentence, you’re probably thinking, “Final expenses? We’ve already deducted every cost under the sun. What’s left to subtract?” How about taxes?

Depending on how you structured your company, your business may or may not pay taxes directly on its profits. If you’re a sole proprietor or if your business is a partnership, for example, your profits are funneled straight to the owners for tax purposes. But if your business pays taxes, you need to subtract those taxes before you state your final profit.

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Free Small Business Income Statements, Spreadsheets, and Templates

By Andy Marker | April 6, 2022

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We’ve compiled a collection of the most helpful small business income statements, worksheets, and templates for small business owners and other stakeholders, free to download. 

Included on this page, you’ll find a small business income statement template , a small business balance sheet and income statement template , a simple small business cash flow template , and a small business comparative income statement . Plus, you’ll find helpful tips on using a small business income statement template .

Printable Small Business Income and Expenses Template

Download Printable Small Business Income and Expenses Template Microsoft Excel | Microsoft Word | Adobe PDF | Google Sheets

Use this printable small business income and expenses template to determine your net income over a period of time. Enter values into the customizable line-item rows, and the template will calculate your revenue and cost of goods sold (COGS) to determine your gross profit. Enter your expenses (such as rent, utilities, and office supplies) to see your total net income. This template is a great tool to track your business's finances over time. 

Read our article on free small business expense templates to find additional resources and to get the most out of your small business budgeting.

Yearly Small Business Income Statement Template

Download Yearly Small Business Income Statement Template Microsoft Excel | Google Sheets

Use this yearly small business income statement template to manage your profit and losses over a three-year timeline. Track your costs in the customizable Expenses column, and enter your revenue and expenses to determine your net income. The template also includes a built-in tax rate calculator for a more accurate account of your net profit. 

To find more resources, check out our comprehensive roundup of free profit and loss templates .

Monthly Small Business Income Statement Template

Download Monthly Small Business Income Statement Template Microsoft Excel | Google Sheets

Use this monthly small business income statement template to track and manage your small business finances. Enter the number of customers and the average sale per customer to determine your total monthly sales. Then, enter your operating, payroll, and office expenses to determine your total expenses. The template will automatically calculate these totals to show your net profit.

Sample Small Business Income Statement Template

Download Sample Small Business Income Statement Template Microsoft Excel | Google Sheets

Use this simple small business income statement template for an overall analysis of your net income. You can customize the Revenue and Expenses lines to include items specific to your business; additionally, the template includes a Years Represented column that allows you to compare numbers over a two-year timeline. This is the perfect tool for taking a quick snapshot of your business cash flow. 

To find more resources, check out our small business budget templates.

Printable Monthly Small Business Income and Expenses Worksheet Template

Download Printable Monthly Small Business Income and Expenses Worksheet Template Microsoft Excel | Adobe PDF | Google Sheets

This simple, printable template is the perfect tool for tracking your business’s income, expenses, and transactions. The template includes three separate worksheets — simply enter monthly financial data, and the template will automatically calculate yearly totals. Help ensure you meet your financial goals, accurately predict projections, and make necessary adjustments with this template.

Freelance Income Statement Template

Download Freelance Income Statement Template Microsoft Excel | Google Sheets

Self-employed individuals can use this template to track their business income from clients, along with any business expenses. Enter your personalized expenses, including rent, office supplies, and insurance, to see your cash outflow. Then, enter your taxes, and the template will automatically calculate your net income. This is a must-have tool for small business owners looking to understand their business profits.

Daily Income and Expenditure Template for Small Business

Download Daily Income and Expenditure Template for Small Business Microsoft Excel | Google Sheets

For a daily analysis of your small business’s cash flow, use this template to track cash receipts, cash payments, and operating expenses. The template automatically calculates these totals on a daily basis to provide you with a detailed financial report. The template also shows your monthly ending cash position, so you can avoid any shortcomings. 

Check out our profit and loss templates for more resources on tracking your business’s cash flow.

Small Business Balance Sheet and Income Statement Template

Download Small Business Balance Sheet and Income Statement Template Microsoft Excel | Google Sheets

Use this income and expenses spreadsheet to help ensure that you never lose sight of your small business’s financial outlook. Enter your revenue and expenses, and the template will automatically calculate your net income. Plus, the customizable year columns enable you to compare your net income over a five-year timeline so that you can easily forecast your business’s economic health. 

Read our article on small business balance sheet templates for more resources on tracking your business expenses.

Small Business Income Statement Template

Download Small Business Income Statement Template Microsoft Excel | Google Sheets

This simple small business income statement template calculates your total revenue and expenses, including advising, equipment, and employee benefits, to determine your net income. Use this template to track and compare your finances over a two-year timeline. Save the document so that you always have quick insight into the financial status of your business.

Startup Business Income and Expenses Template

Download Startup Business Income and Expenses Template Microsoft Excel | Adobe PDF | Google Sheets

Use this startup business income and expenses template to track your business’s cash flow. Compare your budgeted expenses and funding to your actual spending to understand any discrepancies. Overall, this template can help you make well-informed, financially accurate predictions so that you can reach your business goals.

Simple Small Business Cash Flow Template

Download Simple Small Business Cash Flow Template Microsoft Excel | Google Sheets

Use this simple small business cash flow template to monitor your cash increase or decrease over a certain period of time. Enter your cash receipts, payments, COGS, and operating expenses, and the built-in formulas will calculate your total cash payments, net cash change, and month-ending cash position.

Simple Small Business Profit and Loss Template

Download Simple Small Business Profit and Loss Template Microsoft Excel | Google Sheets

Regardless of your industry, you can use this simple small business profit and loss template to analyze your business’s financial status over a specific period of time. Customize your expenses by adding or removing line items, and the built-in formulas will calculate your gross profit and net income. 

Read our article on small business profit and loss templates to find additional resources and to get the most out of your small business’s profit and loss tracking.

Small Business Comparative Income Template

Download Small Business Comparative Income Template Microsoft Excel | Google Sheets

Use this detailed small business comparative template to closely maintain watch over your financial position. Enter line items for income and expenses to compare your budget to actual calculations. With detailed use, this template will enable you to never lose sight of your business's cash flow.

What Is a Small Business Income Statement Template?

A small business income statement template is a financial statement used to report performance. Templates include calculations for revenue, expenses, and overall profit and loss, and they are used to document, analyze, and project business finances. 

If you are a current or prospective small business owner, it’s imperative that you track your income and expenses, as doing so will ensure you have accurate information regarding how your company spends and makes money. An income statement template helps you to identify areas of risk and patterns in profit and loss, and to make educated decisions around your budget. 

A small business income statement template typically includes the following line items for tracking your business's financial status: 

• Budget: A budget is a spending plan for your business based on your estimated income and expenses.
• Cash Ending Position: This refers to the money your business has at any specific point in time. 
• Cash Flow: This is the amount of money that moves in and out of your business. 
• Cost of Goods Sold (COGS): This is any money spent that is associated with your product, such as packaging and labor.
• Expenses: List anything on which you spend money to run your business, such as rent, advertising, equipment, insurance, phone, and employee salaries. 
• Gross Profit: Determine this number by subtracting the COGS from your total sales.
• Gross Revenue: The formula to calculate gross revenue is total revenue less the COGS. 
• Income: List anything that brings money into your business, such as sales and donations. 
• Net Income or Net Profit: This number reflects the amount earned from sales.
• Revenue: Calculate revenue by adding together the total amount of income made by sales and services. 
• Tax: This includes any mandatory monetary contributions made to the government.

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Business Plan Income Statement: Everything You Need to Know

Business plan income statement is an important financial document, which shows a company's profitability in a given period of time. 3 min read

Business plan income statement is an important financial document, which shows a company's profitability in a given period of time.

Understanding an Income Statement

An income statement or a profit and loss statement helps to understand a company's sources of revenue and various items of expenses. In other words, it tells you where the money is coming from and where it's going. A glance at the income statement can tell anyone whether the business is profitable. Basically, an income statement lists out various items and amounts of revenue and expenses, with the net profit figure at the bottom.

You might have heard people talking about a company's bottom line. It's the last line in an income statement, which shows you the amount of net profit of a company in a given period of time after meeting all expenses.

This is the “profit” referred to in a profit and loss statement or the letter “P” of “P & L” account. The “loss” or “L” is the figure that appears if the total amount of expenses exceeds the total amount of revenue.

An income statement is probably the most common and standard financial statement. Another similar statement called the projected profit and loss statement is a standard financial projection tool used in business planning.

Breakdown of a Business Plan Income Statement

It's essential to include a projected income statement in your business plan. Whether you are planning for the internal purpose of the company or preparing a financial document to present before your investors, it's important to know whether you expect the business to be profitable over a specific period of time.

You should start a business plan with an executive summary, followed by other standard components. It must include a financial plan section, complete with a projected balance sheet, cash flow, and income statement. In business planning, the word “projected” is often replaced with the word “pro-forma,” but it means the same thing.

An income statement typically includes the following components:

• Direct cost of sales.
• Production expenses.
• Gross margin.
• Operating expenses.
• Marketing expenses.
• Depreciation .
• Utility expenses.
• Insurance premiums.
• Payroll taxes .
• Profit before interest and taxes.
• Interest expenses.
• Net profit.

Sales or Revenue

The top line in your income statement represents revenue from sales. It's the net sales amount remaining after deducting goods returns and sales discounts. All the direct expenses associated with sales will be deducted from this figure.

Direct Costs of Sales

The cost of goods sold includes all the direct costs incurred in making and delivering the products or services that contributed to sales. It does not include office rent, salaries, and other expenses that are not directly connected with sales.

Gross Margin or Gross Profit

Subtracting the direct cost of goods sold from the number of net sales gives you gross margin. This is the profit before considering operating expenses and taxes.

Operating Expenses

Except for the cost of goods sold, all other expenses necessary to run the business are covered under this head. Rent, utilities, payroll, and marketing costs are examples of operating expenses.

Operating expenses include marketing and administrative expenses like:

• Sales salaries.
• Collateral and promotions.
• Advertising.
• Travel, meetings, client meals, etc.
• Office salaries.

Operating Income

Operating income or earnings before interest, taxes, depreciation, and amortization (EBITDA) is the most reliable indicator of a company's profitability.

If the company is making any interest payments on a loan, it should be included under this head.

Total Expenses

This is the sum total of all expenses, excluding taxes and interest.

Depreciation and Amortization

These are the expenses incurred on tangible and intangible assets. Since the assets do not lose their utility in a single accounting period, the total cost of assets is spread over their total lifetime. The cost applicable for a single accounting period is deducted from revenue as depreciation.

Net Income Before Taxes

This figure represents total earnings of the business before paying income taxes.

This item represents the amount of income tax paid or owed to the federal, state, and local governments. Some companies allocate an estimated amount of taxes they expect to pay in the future.

Net Income or Net Profit

This is the net profit of the business remaining after paying income taxes. This is the bottom line figure that tells at a glance whether a company is making profits or incurring losses.

If you need help with business plan income statement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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How to Write the Financial Section of a Business Plan

Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.

Taking Stock of Expenses

The income statement, the cash flow projection, the balance sheet.

The financial section of your business plan determines whether or not your business idea is viable and will be the focus of any investors who may be attracted to your business idea. The financial section is composed of four financial statements: the income statement, the cash flow projection, the balance sheet, and the statement of shareholders' equity. It also should include a brief explanation and analysis of these four statements.

Think of your business expenses as two cost categories: your start-up expenses and your operating expenses. All the costs of getting your business up and running should be considered start-up expenses. These may include:

• Business registration fees
• Business licensing and permits
• Starting inventory
• Rent deposits
• Down payments on a property
• Down payments on equipment
• Utility setup fees

Your own list will expand as soon as you start to itemize them.

Operating expenses are the costs of keeping your business running . Think of these as your monthly expenses. Your list of operating expenses may include:

• Salaries (including your own)
• Rent or mortgage payments
• Telecommunication expenses
• Raw materials
• Distribution
• Loan payments
• Office supplies
• Maintenance

Once you have listed all of your operating expenses, the total will reflect the monthly cost of operating your business. Multiply this number by six, and you have a six-month estimate of your operating expenses. Adding this amount to your total startup expenses list, and you have a ballpark figure for your complete start-up costs.

Now you can begin to put together your financial statements for your business plan starting with the income statement.

The income statement shows your revenues, expenses, and profit for a particular period—a snapshot of your business that shows whether or not your business is profitable. Subtract expenses from your revenue to determine your profit or loss.

While established businesses normally produce an income statement each fiscal quarter or once each fiscal year, for the purposes of the business plan, an income statement should be generated monthly for the first year.

Not all of the categories in this income statement will apply to your business. Eliminate those that do not apply, and add categories where necessary to adapt this template to your business.

If you have a product-based business, the revenue section of the income statement will look different. Revenue will be called sales, and you should account for any inventory.

The cash flow projection shows how cash is expected to flow in and out of your business. It is an important tool for cash flow management because it indicates when your expenditures are too high or if you might need a short-term investment to deal with a cash flow surplus. As part of your business plan, the cash flow projection will show how  much capital investment  your business idea needs.

For investors, the cash flow projection shows whether your business is a good credit risk and if there is enough cash on hand to make your business a good candidate for a line of credit, a  short-term loan , or a longer-term investment. You should include cash flow projections for each month over one year in the financial section of your business plan.

Do not confuse the cash flow projection with the cash flow statement. The cash flow statement shows the flow of cash in and out of your business. In other words, it describes the cash flow that has occurred in the past. The cash flow projection shows the cash that is anticipated to be generated or expended over a chosen period in the future.

There are three parts to the cash flow projection:

• Cash revenues: Enter your estimated sales figures for each month. Only enter the sales that are collectible in cash during each month you are detailing.
• Cash disbursements: Take the various expense categories from your ledger and list the cash expenditures you actually expect to pay for each month.
• Reconciliation of cash revenues to cash disbursements: This section shows an opening balance, which is the carryover from the previous month's operations. The current month's revenues are added to this balance, the current month's disbursements are subtracted, and the adjusted cash flow balance is carried over to the next month.

The balance sheet reports your business's net worth at a particular point in time. It summarizes all the financial data about your business in three categories:

• Assets :  Tangible objects of financial value that are owned by the company.
• Liabilities: Debt owed to a creditor of the company.
• Equity: The net difference when the  total liabilities  are subtracted from the total assets.

The relationship between these elements of financial data is expressed with the equation: Assets = Liabilities + Equity .

For your  business plan , you should create a pro forma balance sheet that summarizes the information in the income statement and cash flow projections. A business typically prepares a balance sheet once a year.

Once your balance sheet is complete, write a brief analysis for each of the three financial statements. The analysis should be short with highlights rather than in-depth analysis. The financial statements themselves should be placed in your business plan's appendices.

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Why the income statement is crucial to your business.

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Joseph, Director at  Wise Business Plans , has overseen 15K written business plans, raising over $1Bn in funding in more than 400 industries.

As you create your financial projections for your business plan, one of the most important components of your plan will be your income statement. This is sometimes referred to as a profit and loss or P&L statement. The income statement shows how much of a profit your business made — or that you assume you will make if it’s a projection — during a specific period of time. This means it does not factor cumulative profits or losses as you would see in a cash flow statement or a balance sheet.

I want to use the example of a small pizza parlor called Ferriolo's Pizzeria. In this example, I project five years out, although many lenders and investors will want to see the first year broken down by month in addition to a five-year projection.

Revenue And Variable Expenses

Every income statement should include a tally of revenue, the cost of goods sold, merchant credit card costs and gross profit. In the pizza parlor example, the revenue in the income statement represents all the money earned from sales of all food and drink for each year. Revenue in year one totaled $300,000 and in year five reached $480,000. 

Cost of goods sold and merchant credit card costs are considered variable expenses because they vary in direct proportion to your sales volume.

For the pizza parlor, the cost of goods sold is a variable expense because the more pizzas you sell, the more dough, sauce, cheese and toppings you will go through to fulfill customer orders. You have to spend money on these items before you can fulfill orders, and you have to replace them as they are used up.

This example also assumes the parlor will accept credit and debit cards as a form of payment. Credit card companies usually charge a percentage of the transaction to the business, so the more credit/debit card transactions your business conducts, the higher your fees will be.

The gross profit is the amount of money remaining from the revenue after subtracting these variable expenses. In this example, the year one gross profit is the difference between the $300,000 revenue and the total of the variable expenses — $99,000. This leaves $201,000 in gross profit. However, as you'll read in the next section, the pizza parlor is also incurring operating expenses, which are often called fixed expenses because the parlor’s sales volume doesn’t impact the amount of these expenses, although external factors can.

Operating Expenses

Operating expenses include everything from your phone bill to a business license and especially employee wages. In the pizza parlor example, rent, supplies, marketing, liability insurance, utilities, website hosting and more come together for a total operating expense of $185,000 in the first year before reaching $275,000 in the fifth year.

Fixed Costs And Depreciation

Before getting to the net profit — or the profit after both fixed and variable expenses are accounted for — I want to dive into potential impacts on the fixed costs mentioned in the above section as well as depreciation.

Consider a business leasing space for its operation. The amount of rent will remain the same regardless of the business’s performance. The landlord may raise the rent after the current lease is up, but it would still be considered a fixed expense because the rent change was not the result of any increase or decrease in revenue.

Most of the other fixed expenses are self-explanatory, but one specific expense worth pointing out is depreciation. This example assumes that the pizza parlor has spent a substantial amount of money on ovens, refrigerators, freezers, a dishwasher and other expensive equipment needed for its operation.

These are examples of long-term assets in that they don’t need to be replenished on a frequent bases like expenses factored in the cost of goods sold. While the purchase of long-term assets is not factored in the income statement (they are factored in your cash flow statement and balance sheet), depreciation on long-term assets is factored in.

While it would warrant a separate article to explain how depreciation works from an accounting perspective, one thing worth pointing out about it here is that it’s an expense that’s actually paid for when you buy the equipment that depreciates.

In other words, the business will pay its rent and phone bill each month, but it doesn’t get a depreciation bill in the mail to pay each month. Nevertheless, it’s important to the pizza parlor to consider depreciation because its ovens, refrigerators and so on will eventually give out and need to be replaced. Some businesses also incur amortization, which is the same concept as depreciation but for intangible assets, such as patents, copyrights and trademarks.

The profit before interest and taxes represents the amount of revenue remaining after covering all of the variable and fixed expenses mentioned above. In this example, the amount represents your taxable income, as all of the expenses mentioned above would be tax-deductible. If interest is being paid on a business loan, then the interest paid would be tax-deductible as well. In this example, the first-year profit before interest and taxes is $16,000, or the difference between the $201,000 gross profit and the total fixed cost amount of $185,000.

Once the taxable income is determined, the amount owed in taxes can be determined. This example assumes about 21% of taxable income. The net profit is the amount remaining after all variable and fixed expenses, as well as interest and taxes, are deducted. If the number is negative, then it would be a net loss. With the $16,000 profit, taxes must be paid and that leaves you with $13,000 in net profit. In this example, year five is much better with the net profit reaching $36,000.

The income statement can be a valuable way to monitor the performance of the business at during a given point in time, which is why most lenders and investors will want to see it in your business plan.

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How to Prepare an Income Statement

• 09 Dec 2021

When it comes to financial statements , each communicates specific information and is needed in different contexts to understand a company’s financial health.

The income statement is one of the most important financial statements because it details a company’s income and expenses over a specific period. This document communicates a wealth of information to those reading it—from key executives and stakeholders to investors and employees. Being able to read an income statement is important, but knowing how to generate one is just as critical.

Here’s an overview of the information found in an income statement, along with a step-by-step look at the process of preparing one for your organization.

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What Is an Income Statement?

An income statement is a financial report detailing a company’s income and expenses over a reporting period. It can also be referred to as a profit and loss (P&L) statement and is typically prepared quarterly or annually.

Income statements depict a company’s financial performance over a reporting period. Because the income statement details revenues and expenses, it provides a glimpse into which business activities brought in revenue and which cost the organization money—information investors can use to understand its health and executives can use to find areas for improvement.

Related: How to Read & Understand an Income Statement

An income statement typically includes the following information:

• Revenue: How much money a business took in during a reporting period
• Expenses: How much money a business spent during a reporting period
• Costs of goods sold (COGS): The total costs associated with component parts of whatever product or service a company makes and sells
• Gross profit: Revenue minus costs of goods sold
• Operating income: Gross profit minus operating expenses
• Income before taxes: Operating income minus non-operating expenses
• Net income: Income before taxes
• Earnings per share (EPS): Net income divided by the total number of outstanding shares
• Depreciation: Value lost by assets, such as inventory, equipment, and property, over time
• EBITDA: Earnings before interest, depreciation, taxes, and amortization

Related: 13 Financial Performance Measures Managers Should Monitor

Steps to Prepare an Income Statement

1. choose your reporting period.

Your reporting period is the specific timeframe the income statement covers. Choosing the correct one is critical.

Monthly, quarterly, and annual reporting periods are all common. Which reporting period is right for you depends on your goals. A monthly report, for example, details a shorter period, making it easier to apply tactical adjustments that affect the next month’s business activities. A quarterly or annual report, on the other hand, provides analysis from a higher level, which can help identify trends over the long term.

2. Calculate Total Revenue

Once you know the reporting period, calculate the total revenue your business generated during it.

If you prepare the income statement for your entire organization, this should include revenue from all lines of business. If you prepare the income statement for a particular business line or segment, you should limit revenue to products or services that fall under that umbrella.

3. Calculate Cost of Goods Sold (COGS)

Next, calculate the total cost of goods sold for any product or service that generated revenue for your business during the reporting period. This encompasses direct and indirect costs of producing and selling products or services, including:

• Direct labor expenses
• Material expenses
• Parts or component expenses
• Distribution costs
• Any expense directly tied to the production of your product or service

4. Calculate Gross Profit

The next step is to determine gross profit for the reporting period. To calculate this, simply subtract the cost of goods sold from revenue.

5. Calculate Operating Expenses

Once you know gross profit, calculate operating expenses (OPEX).

Operating expenses are indirect costs associated with doing business. These differ from cost of goods sold because they’re not directly associated with the process of producing or distributing products or services. Examples of expenses that fall under the OPEX category include:

• Office supplies

6. Calculate Income

To calculate total income, subtract operating expenses from gross profit. This number is essentially the pre-tax income your business generated during the reporting period. This can also be referred to as earnings before interest and taxes (EBIT).

7. Calculate Interest and Taxes

After calculating income for the reporting period, determine interest and tax charges.

Interest refers to any charges your company must pay on the debt it owes. To calculate interest charges, you must first understand how much money you owe and the interest rate being charged. Accounting software often automatically calculates interest charges for the reporting period.

Next, calculate your total tax burden for the reporting period. This includes local, state, and federal taxes, as well as any payroll taxes.

8. Calculate Net Income

The final step is to calculate net income for the reporting period. To do this, subtract interest and then taxes from your EBIT. The number remaining reflects your business’s available funds, which can be used for various purposes, such as being added to a reserve, distributed to shareholders, utilized for research and development, or to fuel business expansion.

Income Statement Example

Below is an example income statement for a fictional company. As you can see at the top, the reporting period is for the year that ended on Sept. 28, 2019.

Go to the alternative version .

During the reporting period, the company made approximately $4.4 billion in total sales. It cost the business approximately $2.7 billion to achieve those sales. As a result, gross profit was about $1.6 billion.

Next, $560.4 million in selling and operating expenses and $293.7 million in general administrative expenses were subtracted. This left the company with an operating income of $765.2 million. To this, additional gains were added and losses subtracted, including $257.6 million in income tax.

At the bottom of the income statement, it’s clear the business realized a net income of $483.2 million during the reporting period.

A Critical Skill for Business Leaders

Although the income statement is typically generated by a member of the accounting department at large organizations, knowing how to compile one is beneficial to a range of professionals.

Whether you’re an individual contributor, a member of the leadership team in a non-accounting role, or an entrepreneur who wears many hats, learning how to create an income statement can provide a deeper understanding of the financial metrics that matter to your business. It can also help improve your financial analysis capabilities .

Do you want to take your career to the next level? Consider enrolling in Financial Accounting —one of three courses comprising our Credential of Readiness (CORe) program —which can teach you the key financial topics you need to understand business performance and potential. Not sure which course is right for you? Download our free flowchart .

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How to Do a Monthly Income Statement Analysis That Fuels Growth

Posted july 6, 2021 by noah parsons.

As an entrepreneur or business owner, you need to get to know your income statement. This critical document not only helps you understand the health of your business but where there may be potential risks, opportunities, and issues that need to be addressed. It’s a document that when read and analyzed can help inform your business strategy , set more accurate milestones , and better inform the goals you set for you and your team.

Like any financial statement, it can be a daunting task to try and understand how to read and analyze your income statement. But by taking the time to learn how, setting up a consistent review process, and equipping yourself with the right tools — it can become a fruitful and simple exercise. Let’s dive into how you can use your income statement to build a stronger and healthier business.

What is a monthly income statement?

Your income statement, also known as the profit and loss statement (P&L), summarizes your business revenue and operating expenses over a period of time. This is the most popular and most common financial statement in any business plan and helps you calculate your net income for that same period. The most basic use of your income statement is to tell you if your business is profitable or not. 

Depending on the complexity and size of your business, you may find that your statement is fairly simple. But as your business grows, and you add more expenses, revenue streams, and other line items, it can become more complex. Generally, this is what you can expect to find on your income statement.

• Revenue or sales — The amount of money a business takes in 
• Cost of goods sold (COGS) — The cost of what it takes to produce whatever a business sells
• Gross profit — Total revenue minus COGS
• Expenses — The amount of money a business spends
• Earnings before tax — Operating income minus non-operating expenses
• Taxes — Total tax expense
• Net earnings — Income before taxes minus taxes

What is the purpose of an income statement?

The purpose of an income statement is to display your financial performance over a given period. It’s the current snapshot of your actual business performance and it helps you define what occurred in a given day, week, month, and year. 

Now, the true benefit of reviewing your income statement comes with comparing it to other financial documents. Looking between your cash flow statement and balance sheet, for example, can help you determine if your business is truly profitable, if you’re overspending and if you have a healthy level of cash to invest in your business.

Additionally, you want to leverage your income statement to understand if you’re performing better, worse or as expected. This is done by comparing it to your sales and expense forecasts through a review process known as plan vs actuals comparison. You then update projections to match actual performance to better showcase how your business will net out moving forward.

In short, you use your income statement to fuel a greater analysis of the financial standing of your business. It helps you identify any top-level issues or opportunities that you can then dive into with forecast scenarios and by looking at elements of your other financial documentation.

How do you analyze an income statement?

Your income statement is a great place to start your financial review meeting. Conducting an income statement analysis will help you answer key questions about your business, find opportunities for growth, and uncover potential problems before they have a significant impact on your business. 

Here are 4-steps you can take to ensure each review is successful.

1. Check your bottom line

To kick off your review, look to the bottom of your statement. The number there gives you an idea of how your business performed during a specific period. 

Typically, you want to see a positive number, meaning that you earned more than you spent. But if that bottom line is negative, that tells you what the focus of your review should be. You need to find out why you’re in the red and develop a plan for turning it around.

Keep in mind that a net loss once in a while does not necessarily imply disaster. Typically if you’re a new company or experiencing rapid periods of growth, you can expect a lot of upfront costs. Making it unlikely that you’ll turn a profit for a few quarters to a few years. This can also occur if your business is seasonal or cyclical.

You just don’t want net losses to become a trend. If they do, you’ll want to consistently review your cash flow statement to be sure you have enough of a runway to keep your business operational. 

2. Check your sources of income and expense categories

With your current bottom line in mind, it’s time to dive into the categories within your income statement. Specifically, your income streams and expenses. Starting with income, ask yourself the following questions.

• Do they make sense for the business? 
• Are they sustainable? 
• Has it grown gradually over each period? Or is revenue this period higher than usual?
• Is every revenue stream sustainable? Or are there unique line items this period?

Make sure you understand why your business performed the way it did. What events may have increased or decreased revenue and if that will continue over time. Now dive into the associated expenses.

Are they logical? For most businesses, you will see salaries and wages, insurance, rent, supplies, interest, and at least a few other things. Is anything missing that you would expect to see? Are there any specific costs associated with individual lines of revenue?

Like your revenue, try to uncover what leads to specific expenses and where you can work on reducing them. Again, you will likely have times where your expenses are higher than normal. But if they’re consistently rising while your revenue is stagnant or falling, you need to take a closer look at what and why your spending over the next period.

3. Compare your numbers

It was mentioned before, but part of your analysis is comparing results to the last month, quarter, and/or year.  Usually, your income statement will have separate columns showing figures for these prior periods. If the document doesn’t already show the percentage change in every category, you’ll need to calculate those numbers yourself. 

Connect results to projects, teams, or events that drove up revenue or reduced expenses. Question any significant changes. And then look ahead to what the next steps are based on those results and if any adjustments should be made.

Also, be sure to keep in mind why your business was performing the way it was during those previous periods. A dramatic uptick now may be due to poor performance at the same time last year. Not bringing that up can inflate your current results to appear incredibly positive. Meaning you’re still sustainable, but not improving like you could or should be.

4. Review your math

If you’re working off of a manual Excel sheet to build and review your income statement, you’ll want to double-check your math. Adding in numbers, changing algorithms, deleting cells can all lead to mistakes that affect your bottom line. If you can, review your previous period first to refamiliarize yourself with the statement and confirm it’s accurate.

Then move onto creating or updating your current period.If maintaining accuracy on your current statement takes up too much time, you may want to consider using a planning tool like LivePlan . LivePlan makes it easy to review your financials because it pulls in real-time data from your cloud accounting tool like QuickBooks or Xero . It’s seamless to compare actuals against your forecast .

Questions to answer during your income statement analysis

Here are a few of the key questions that you’ll answer when you review your profit and loss statement.

Did we have good sales last month?

It’s easiest to start your review at the top of the profit and loss and work your way down. At the top, you’ll find revenue, and that’s a great place to start.

When you look at your revenue from last month, you should compare it to three other numbers:

• Planned goal for revenue
• Revenue from last month
• Revenue from the same month last year

You’ll want to see if you met your goal for revenue and then answer the question, “why or why not?” If you beat your sales goal, you should discuss what worked better than expected. Are there successes that can be repeated? If you didn’t meet your goal, what prevented you from meeting your goal?

How did our sales compare to the previous month and year?

Ask the same questions about your sales compared to the previous month and the same month last year. A decline from the previous month might be fine if your business has normal seasonality. Most businesses will be looking to grow year-over-year, so comparing your sales to how you did in the same month last year is usually a good measure of your long-term success.

Now, look ahead at your plan for the coming months and decide if you should revise your strategy going forward. Set new goals based on what you achieved during the past month.

Did we spend more than planned?

Now it’s time to look at your expenses—both your cost of goods sold (COGS) and your operational expenses. 

Similar to revenue, you should compare your expenses to your plan, last month, and the same month last year. 

The questions you ask are also similar: are you staying on budget? Are expenses growing or shrinking? Are these changes O.K.? For example, if your sales are growing faster than planned, it’s likely that your expenses are also growing. This is probably fine, but worth keeping track of.

Like you did with revenue, consider your strategy, and plan going forward. Should you adjust your budget or keep things as they are? Set a task for yourself to revise if needed and then share that updated plan with anyone who is spending money in your business so that they can stay on track too.

Did our margins change?

After you’ve reviewed your expenses, take a few minutes to look at your gross margin . Your gross margin measures how much of each sale goes toward the cost of the products and services that you sell, otherwise known as the cost of goods sold.

If this number is shrinking, it means that your costs are going up and eating into your profits. Your overall costs could be going up because you are selling more of a product that costs you more to make or procure. Or maybe your suppliers are charging you more. Either way, if this number is growing, you’ll want to dig into the reasons why and take action.

If your gross margin is growing, congratulations! Your business is becoming more efficient and delivering more profit to the bottom line.

How profitable is our business?

This is the proverbial “bottom line” in your business. Again, you’ll want to compare this number to your plan, the previous period, and the same time period last year. 

If you are more or less profitable than planned, you’ll want to dig into the reasons why. Did expenses go up and reduce profitability? Maybe sales declined, but expenses stayed fairly flat which would also reduce profitability. Look at your numbers and figure out why they are changing and come up with an action plan for changes going forward.

I sold more but why didn’t profits go up?

This is always an interesting problem that many businesses have. You sold more than you did last month, but profits stayed the same or perhaps even went down. How is that possible?

The first place to look is your operational expenses. Perhaps you spent more on marketing than you planned or you brought on some new employees and they helped generate additional sales, but not enough to account for the increases in payroll.

If the answer isn’t in your operational expenses, take a look at your cost of goods. It’s common for the answer to a profitability question to be hiding there. 

As I discussed in the question about margins, you’ll want to look and see if your cost of goods and gross margin changed. Perhaps your sales increased because you sold more of a product that has a high cost, while other low-cost products or services didn’t sell as well.

Consider a bike shop as an example. Mountain bikes might have a pretty low margin — the shop only makes a small profit on each sale. On the other hand, the service department is very profitable. Every repair makes a big profit. So, if sales of mountain bikes increase while service revenue remains the same, the bike shop won’t make as much money as it did the previous month.

In this case, the bike shop might want to explore ideas for growing service revenue or perhaps consider increasing the price of its mountain bikes so that they are more profitable.

Make reviewing your income statement a regular occurrence

Doing an income statement analysis — comparing your key numbers to your plan as well as last month and last year — is extremely useful. It helps answer key questions about your business performance and how you can keep growing, building profits that you can reinvest into your business. 

Build the habit of reviewing your budget compared to your actual performance and you will build a stronger, healthier business. Studies actually prove this — they show that goal setting and measuring progress toward those goals greatly increases your chances for success.

A monthly review of your business financials is invaluable and it doesn’t have to take a ton of time if you have the right tools available. Work with your accountant to make sure you can get the reports you need or use a simple tool like LivePlan to automate the entire process. Either way, take the time to look at your numbers so you can grow your business.

*Editor’s Note: This article was originally written in 2019 and updated for 2021.

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Home > Financial Projections > Income Statement Forecast

Income Statement Forecast

The income statement forecast, sometimes called the profit and loss forecast, is one of the three main statements for business plan financials. The income statement forecast shows a business’s financial performance over an accounting period. It is important to realize that the accounting period can be any length but is usually a month or a year.

Income Statement Forecast Format

A typical and useful income statement format for management is shown in the example below. The level of detail for each item will depend on your business, and who is using the information. For example, revenue could be broken down by product category, or operating expenses could be broken down into multiple lines such as rent, wages, light & heat etc.

Example Format

Understanding the income statement.

The projected income statement is important for many reasons:

• Firstly management should use the income statement forecast to identify whether the business made a profit for the period. The important figure is the bottom line net income. It should also use it to establish % relationships between expenses and revenue, to spot trends in operating profit ratios, and for comparison of actual results against a projection.
• Secondly they are used by suppliers to decide on whether credit is given as they identify the profitability of your business.
• Bank Managers utilise the income statement forecast as they base their lending ratios on certain aspects of it, for example interest cover = earinings before interest and tax / interest paid is used to determine whether the profit the business is making is sufficient to cover the interest payments on their loan.
• Finally the income statement forecast is used by investors to decide whether to invest or not and at what price. For example they will look at the income before tax to establish their likely return on investment.

Any number of people could be using your income statement forecasts to make decisions about your business. It is important that you have an understanding of what information the income statement is providing and what that information is telling you.

Our financial projections template includes the projected income statement template.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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Pro Forma Financial Statements (with Templates and Examples)

Bryce Warnes

Reviewed by

Janet Berry-Johnson, CPA

April 21, 2022

This article is Tax Professional approved

Pro forma definition

According to Merriam-Webster , “pro forma” means:

• Made or carried out in a perfunctory manner or as a formality
• Based on financial assumptions or projections

I am the text that will be copied.

Pro forma is actually a Latin term meaning “for form” (or today we might say “for the sake of form, as a matter of form”).

When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios. They’re a way for you to test out situations you think may happen in the future to help you make business decisions.

There are three major pro forma statements:

• Pro forma income statements
• Pro forma balance sheets
• Pro forma cash flow statements

Pro forma statements look like regular statements, except they’re based on what ifs, not real financial results. As in, “What if my business got a $50,000 loan next year?” Your pro forma statements for that scenario would show what your income, account balances, and cash flow would look like with a $50,000 loan.

Since pro forma statements deal with potential outcomes, they’re not considered GAAP compliant . This is because GAAP compliant reports must be based on historical information.

Pro forma statements don’t need to meet the strictest accounting standards , but must be clearly marked as “pro forma” and can’t be used for things like filing taxes. Using pro forma statements that aren’t marked as such to misrepresent your business to investors, the IRS, or financial institutions can be penalized by the Securities and Exchange Commission).

However, pro forma statements are still extremely useful. They can help you make a business plan, create a financial forecast, and even get funding from potential investors or lenders.

Different but related: you can send clients pro forma invoices to let them know how much their order would be if they placed it today.

Why create pro forma statements?

Creating pro forma statements for future scenarios can help you:

• Get financed, by showing lenders or investors how you would use their money to sustainably grow your business.
• Plan for the future, by considering best, worst, and most likely case scenarios in detail.
• Anticipate changes that may affect your business as it grows, such as entering a new tax bracket.

For these purposes, pro forma statements are typically created as a part of a financial forecast in financial accounting. Big corporations who have in-house accountants use pro forma statements for financial modeling and forecasting different scenarios.

Pro forma statements vs. budgets

It may be tempting to think of a pro forma statement as the same as a business budget . After all, you create both in anticipation of the future. And both help you plan how you’ll use your money. But budgets and pro forma statements are two distinct financial tools.

Think of it this way: A pro forma statement is a prediction, and a budget is a plan. Your budget may be based on the financial information of your pro forma statements—after all, it makes sense to make plans based on your predictions.

For example: Your income this year is $37,000. According to your pro forma annual income statement, your financial projections show it will be $44,000 next year. So, when you create next year’s budget, you can include that extra $7,000—maybe spending $4,000 over the course of the year to pay down the principal on a loan , while adding $3,000 to savings.

Types of pro forma statement

There are four main types of pro forma statements. While they all fall into the same categories—income statement, balance sheet, and cash flow statement—they differ based on the purpose of the financial forecast.

1. Full-year pro forma projection

This type of pro forma projection takes into account all of your financials for the fiscal year up until the present time, then adds projected outcomes for the remainder of the year. That can help you show investors or partners what business finances could look like by the end of the fiscal year.

2. Financing or investment pro forma projection

You may be courting investors or trying to convince your business partners of the value of a capital investment or additional financing. In that case, you can use a financing pro forma projection to make your case. It takes into account an injection of cash from an outside source—plus any interest payments you may need to make—and shows how it will affect your business’s financial position.

3. Historical with acquisition pro forma projection

This type of pro forma projection looks at the past financial statements of your business, plus the past financial statements of a business you want to buy . Then it merges them to show what your financials would have looked like if you made a business combination (or merger) earlier. You can use this scenario as a model of what may happen in the future if you buy the other business and restructure now.

4. Risk analysis pro forma projection

Looking at both best case and worst case scenarios helps you make financial decisions based on challenges you may face in the future. For instance, what happens if your main vendor raises their prices like they did last year? Or how will that proposed transaction of buying new equipment impact you long term? Risk analysis lets you take the future for a test ride, and try out different outcomes.

Pro forma templates

To create a pro forma statement, you can use the same template you’d use for a normal financial statement. You may want to use Bench’s free templates:

• Income statement
• Balance sheet
• Cash flow statement

How to create pro forma statements

The sample pro forma statements below may look different from the statements you create, depending on what your template looks like. But generally, these are the steps you need to take to create them—and the info your pro forma statements should include.

Creating a pro forma income statement

There are five steps to creating a pro forma income statement:

• Set a goal for sales in the period you’re looking at. Let’s say you want to increase your income by $18,000 over the course of one year.
• Set a production schedule that will let you reach your goal, and map it out over the time period you’re covering. In this case, you’ll want to earn an additional $1,500 income every month, for 12 months.
• Plan how you’ll match your production schedule. You could do this by growing your number of sales a fixed amount every month, or gradually increasing the amount of sales you make per month. It’s up to you—trust your experience as a business owner.
• It’s time for the “loss” part of “ Profit and Loss .” Calculate the cost of goods sold for each month in your projection. Then, deduct it from your sales. Deduct any other operating expenses you have, as well.
• Prepare your pro forma income statement using data you’ve compiled in the prior four steps.

One note: your pro forma statements will be much more accurate if your bookkeeping is up to date. That way, when you project future periods, you’re basing it off the reality of your business today.

How Bench can help

To predict the future, you first need to understand the past. With Bench, you get a crystal clear image of your financial history so you can focus on planning your future. We’re America’s largest bookkeeping service helping thousands of business owners better understand the financial health of their operations so they can keep focused on growth and planning. When it comes time to create a pro forma statement, you have reliable numbers and reports to get started. We may not be a crystal ball, but we’re the next best thing. Learn more .

Example pro forma income statement:

Rosalia’s Reliable Recordings

Creating a pro forma cash flow statement

You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement. That means taking info from the income statement, then using the cash flow statement format to plot out where your money is going, and what you’ll have on hand at any one time. This pro forma statement can be part of a larger cash flow forecast used for decision making.

Your projected cash flow can give you a few different insights. If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory. You’ll have to make plans to borrow money and pay it off.

On the other hand, if net cash flow is positive, you can plan on having enough extra cash on hand to pay off loans, or save for a big investment.

Example pro forma cash flow statement

Mickie’s Murakami Museum

Creating a pro forma balance sheet

By drawing on info from the income statement and the cash flow statement, you can create pro forma balance sheets. However, you’ll also need previous balance sheets to make this useful—so you can see how your business got from “Balance A” to “Balance B.”

The balance sheet will project changes in your business accounts over time. So you can plan where to move money, when.

Example pro forma balance sheet

Daily Dumpling Deliveries

Once you’ve created your pro forma income statements, and cast your eyes forward to the future of your business, you can start planning how you’ll spend your money. It’s time to create a small business budget .

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What Is an Income Statement?

• How It Works

Parts of an Income Statement

• How It's Used

The Bottom Line

• Corporate Finance
• Financial statements: Balance, income, cash flow, and equity

Income Statement: How to Read and Use It

An essential financial document that reports revenue, expenses, gains, and losses

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

• Accounting Explained With Brief History and Modern Job Requirements
• Accounting Equation
• Current and Noncurrent Assets
• Accounting Theory
• Accounting Principles
• Accounting Standard
• Accounting Convention
• Accounting Policies
• Principles-Based vs. Rules-Based Accounting
• Accounting Method
• Accrual Accounting
• Cash Accounting
• Accrual Accounting vs. Cash Basis Accounting
• Financial Accounting Standards Board (FASB)
• Generally Accepted Accounting Principles (GAAP)
• International Financial Reporting Standards (IFRS)
• IFRS vs. GAAP
• US Accounting vs. International Accounting
• Understanding the Cash Flow Statement
• Breaking Down The Balance Sheet
• Understanding the Income Statement CURRENT ARTICLE
• Financial Accounting
• Financial Accounting and Decision-Making
• Financial vs. Managerial Accounting
• Cost Accounting
• Certified Public Accountant (CPA)
• Chartered Accountant (CA)
• Accountant vs. Financial Planner
• Tax Accounting
• Forensic Accounting
• Chart of Accounts (COA)
• Double Entry
• Closing Entry
• Introduction to Accounting Information Systems
• Inventory Accounting
• Last In, First Out (LIFO)
• First In, First Out (FIFO)
• Average Cost Method

An income statement is a financial report used by a business. It tracks the company's revenue, expenses, gains, and losses during a set period. Also known as the profit and loss (P&L) statement or the statement of revenue and expense, it provides valuable insights into a company’s operations, the efficiency of its management, underperforming sectors, and its performance relative to industry peers.

The income statement is one of the three important financial statements used for reporting a company’s financial performance over a set accounting period. The other two key statements are the balance sheet  and the cash flow statement .

Key Takeaways

• The income statement is a financial report that shows a company's income and expenditures during a set period.
• An income statement shows a business's revenue, expenses, gains, and losses, starting with revenue and ending with net income.
• Other financial statements used by businesses are the balance sheet and cash flow statement.
• An income statement provides insight into a company’s operations, efficiency, management, and performance relative to others in the same sector.
• The income statement can be presented in a single-step or multi-step format.

Mira Norian / Investopedia

Understanding the Income Statement

The income statement is an integral part of the company performance reports. While the balance sheet provides a snapshot of a company’s financials as of a particular date, the income statement reports income through a specific period, usually a quarter or a year.

Investopedia / Theresa Chiechi

The income statement gives an account of how the net revenue  realized by the company gets transformed into net earnings (profit or loss). This requires reporting four key items: revenue, expenses, gains, and losses. An income statement starts with the details of sales and then works down to compute  net income  and eventually earnings per share (EPS) . In each line, the income statement does not differentiate between cash and non-cash receipts (sales in cash vs. sales on credit) or cash vs. non-cash payments/disbursements (purchases in cash vs. purchases on credit).

The period the income statement covers is indicated in its heading. For example, it could read: "year ended January 31, 2024", which would be the company's fiscal year , or "three months ended March 31, 2024", which means the first three months of the calendar year.

A publicly traded company must submit income statements to the U.S. Securities and Exchange Commission (SEC).

The format of an income statement may vary, depending upon the local regulatory requirements, the diversified scope of the business, and the associated operating activities. However, regardless of format, certain information will be present.

Operating Revenue

Revenue realized through primary activities is often referred to as operating revenue . For a company manufacturing a product, or for a wholesaler, distributor, or retailer involved in the business of selling that product, the revenue from primary activities refers to revenue achieved from the sale of the product.

Similarly, for a company (or its franchisees) in the business of offering services, revenue from primary activities refers to the revenue or fees earned in exchange for offering those services.

Non-Operating Revenue

Revenue realized through secondary, noncore business activities is often referred to as nonoperating, recurring revenue. This revenue is sourced from the earnings that are outside the purchase and sale of goods and services such as income from:

• Interest earned on business capital in the bank
• Renting business property
• Strategic partnerships like royalty payments
• Advertisements placed on business property

Also called other sundry income , gains indicate the net money made from other activities like the sale of long-term assets. These include the net income realized from one-time nonbusiness activities, such as a company selling its old transportation van, unused land, or a subsidiary company.

Revenue should not be confused with receipts. Payment is usually accounted for in the period when sales are made or services are delivered. Receipts are the cash received and are accounted for when the money is received.

For example, a customer may take goods/services from a company on Sept. 28, which will lead to the revenue accounted for in September. The customer may be given a 30-day payment window due to his excellent credit and reputation, allowing until Oct. 28 to make the payment, which is when the receipts are accounted for.

A business's cost to continue operating and turning a profit is known as an expense. Some of these expenses may be written off on a tax return if they meet Internal Revenue Service (IRS) guidelines.

Primary-Activity Expenses

These are all expenses incurred for earning the average operating revenue linked to the primary activity of the business. They include the cost of goods sold (COGS); selling, general, and administrative (SG&A) expenses; depreciation or amortization ; and research and development (R&D) expenses. Typical items that make up the list are:

• Employee wages
• Sales commissions
• Transportation

Secondary-Activity Expenses

These are all expenses linked to noncore business activities, like interest paid on loan money. They may be recurring or happen only once.

Losses as Expenses

These are all expenses that go toward a loss-making sale of long-term assets, one-time or any other unusual costs, or expenses toward lawsuits.

Income Statement Structure

Mathematically, net income is calculated based on the following:

Net Income = (Revenue + Gains) - (Expenses + Losses)

To understand the above formula with some real numbers, let’s assume that a fictitious sports merchandise business, which additionally provides training, is reporting its income statement for a recent hypothetical quarter.

Investopedia / Sabrina Jiang

The company received $25,800 from the sale of sports goods and $5,000 from training services for a total of $30,800 in revenue. However, that money didn't stay in its pocket. Generating that revenue cost it a total of $10,650. Major expenses included procurement costs, rent, and wages.

The company also realized net gains of $2,000 from the sale of an old van, and incurred losses worth $800 for settling a dispute raised by a consumer.

If you subtract all the outgoings from the money the company received, you are left with $21,350. That's the company's net income for the given quarter.

Single-Step vs. Multiple-Step Income Statement

The above example is the simplest form of income statement that any standard business can generate. It is called the single-step income statement as it is based on a simple calculation that sums up revenue and gains and subtracts expenses and losses.

However, real-world companies often operate on a global scale, have diversified business segments offering a mix of products and services, and frequently get involved in mergers , acquisitions , and strategic partnerships. Such a wide array of operations, diversified set of expenses, various business activities, and the need for reporting in a standard format per regulatory compliance leads to multiple and complex accounting entries in the income statement.

In a multi-step income statement for a large corporation, the measures of profitability are reported at four different levels in a business's operations: gross, operating, pretax, and after-tax. This segregation helps in identifying how the income and profitability are moving/changing from one level to the other. For instance, high gross profit but lower operating income indicates higher expenses, while higher pretax profit and lower post-tax profit indicate loss of earnings to taxes and other one-time, unusual expenses.

Listed companies follow the multiple-step income statement, which segregates the operating revenue, operating expenses, and gains from the nonoperating revenue, nonoperating expenses, and losses, as well as offering many more details.

Income Statement Example

For a real-world example, let's look at Microsoft Corporation's June 2024 Income Statement as reported to the Securities and Exchange Commission (SEC).

Revenue Section

The Revenue section shows that Microsoft’s gross margin, also known as gross (annual) profit , for the fiscal year ending June 30, 2023, was $171.0 billion. This number is arrived at by deducting the cost of revenue ($74 .1 billion) from the total revenue ($245.1 billion)—in other words, revenue minus the amount that it cost to make that $245.1 billion.

Comparing these numbers, you can see that just over 30% of Microsoft’s total sales went toward costs for revenue generation.

Operating Expenses

Operating expenses are further expenses that are subtracted from total revenue. Microsoft spent $29.5 billion on research and development (R&D), over $24.4 billion on sales and marketing costs, and $7.6 billion on general and administrative costs. Total operating expenses are computed by summing all these figures ($74.1 billion + $29.5 billion + $24.4 billion + $7.6 billion) to arrive at $135.7 billion.

Reducing total operating expenses from total revenue leads to operating income of $109.4 billion ($245.1 billion - $135.7 billion). This figure represents the earnings before interest and taxes (EBIT) for Microsoft's core business activities. It will be used later to derive the net income.

If total revenue minus total operating expenses is a negative number, this is considered an operating loss.

Income From Continuing Operations

Following operating expenses are other forms of income, known as income from continuing operations. This includes operating income, other net income, interest-linked expenses, and applicable taxes. Added these together with operating income arrives at a net income of $88.1 billion for Microsoft.

Net income is then used to calculate earnings per share (EPS) using the average shares outstanding, which are also listed on the income statement. EPS is calculated by dividing the net income figure by the number of weighted average shares outstanding. With 7.433 billion outstanding shares for Microsoft, its basic EPS came to $11.86 per share ($88.1 billion ÷ 7.433 billion).

Uses of Income Statements

Income statements can be used in a variety of ways. Externally, they are most commonly used by investors and creditors. Internally, they can be used by company executives or management teams.

The primary purpose of an income statement is to convey details of profitability and business activities of the company to the stakeholders. It also provides detailed insights into the company’s internal activities . This can be used for comparison across different businesses and sectors. By understanding the income and expense components of the statement, an investor can appreciate what makes a company profitable.

Primary revenue and expenses offer insights into how well the company’s core business is performing. Secondary revenue and fees, on the other hand, account for the company’s involvement and expertise in managing ad hoc, non-core activities. Compared with the income from the sale of manufactured goods, a substantially high-interest income from money lying in the bank indicates that the business may not be using the available cash to its full potential by expanding the production capacity or that it is facing challenges in increasing its market share amid competition.

On the other hand, recurring secondary income income such as rental income from hosting billboards at the company factory along a highway indicates that management is capitalizing upon the available resources and assets for additional profitability.

Based on these types of insights from income statements, management can make decisions like:

• Expanding to new geographic areas
• Pushing sales
• Expanding into a new sector
• Expanding production capacity
• Increasing the use of assets
• Selling or buying capital assets
• Shutting down a department or product line

Competitors also may use income statements to gain insights about the success parameters of a company, such as how much it is spending on research and development. This can prompt them to change their own business model or spending.

Creditors are often more concerned about a company’s future cash flows than its past profitability. However, their research analysts can use an income statement to compare year-on-year and quarter-on-quarter performance. They can infer, for example, whether a company’s efforts at reducing the cost of sales helped it improve profits over time, or whether management kept tabs on operating expenses without compromising on profitability.

What Are the Four Key Elements of an Income Statement?

The four key elements in an income statement are revenue, expenses, gains, and losses. Together, these provide the company's net income for the accounting period.

What Is the Difference Between Operating Revenue and Non-Operating Revenue?

Operating revenue is realized through a business' primary activity, such as selling its products. Non-operating revenue comes from ancillary sources such as interest income from capital held in a bank or income from rental of business property.

What Insights Should You Look for in an Income Statement?

The income and expense components can help investors learn what makes a company profitable (or not). Competitors can use them to measure how their own company compares on various measures. Research analysts use them to compare performance year-on-year and quarter-on-quarter.

An income statement is a financial statement that lays out a company's revenue, expenses, gains, and losses during a set accounting period. It provides valuable insights into various aspects of a business, including its overall profitability and earnings per share.

Investors, competitors, and executives can use the income statement to better understand a company’s operations, the efficiency of its management, areas that may be eroding profits, and whether the company is performing in line with industry peers.

U.S. Securities and Exchange Commission. " Beginners' Guide to Financial Statement ."

U.S. Securities and Exchange Commission. " Exchange Act Reporting and Registration ."

U.S. Securities and Exchange Commission. “ Microsoft: Form 10-K for the Fiscal Year Ended June 30, 2024 .” Page 56.

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Income Statements

• How to Read and Understand an Income Statement

An income statement provides business owners with a digestible way to review revenue and expenses over a period of time. Individual transactions are grouped into specific categories to show the total income, total cost of goods, gross profit, total expenses, total other income and expenses, and net income of a business. This guide will help you read and understand the components of an income statement:

• What is an Income Statement?

An income statement, also known as a profit-and-loss statement, is a financial document that outlines a company’s expenses, revenues, and profitability typically over a monthly, quarterly, or annual period. This sheet, alongside a balance sheet and cash flow statement, are the three primary sources providing insight to a company’s financial performance.

What’s Included on an Income Statement?

An income statement shows you the high-level categories of revenues and expenses in a number of specific categories. These categories are:

• Total Revenue : The total or gross income a company makes from selling products or services.
• Cost of Goods Sold (COGS) : The direct costs necessary for producing goods, calculated by adding initial inventory to purchases and then subtracting the ending inventory from that sum.
• Gross Profit : The profits a company makes after subtracting the costs of production.
• Operating Expenses : Any costs incurred from normal business operations, such as utilities and employee salaries.
• Operating Profit : Company profit before taxes and interest are deducted.
• Interest Expenses : All interest costs related to borrowed money based on what the original lender charges, the sum of net income, interest, and taxes.
• Earning Before Interest and Taxes (EBIT or EBITDA) : A company’s earnings before interest and taxes.
• Income Tax Expense : The total taxes owed by a company.
• Net Profit : The total profits of a company after paying all its expenses, such as taxes, aka “the bottom line”.

Together on a financial statement, these metrics communicate performance during the current period and year-to-date. Net income shows the literal bottom line of a company’s profits by subtracting expenses from total revenue.

Businesses may have more or less on their income statements, depending on whether they have additional sources of revenue or expenses.

• Tips for Reading an Income Statement (with Examples)

Start with the Bottom Line

It’s counterintuitive, but with income statements, you need to start at the bottom.

The literal “bottom line” shows net profits, one of the best indicators of a company’s performance. The bottom line above is a positive $7,513.05 , showing the business made a profit last month.

Know Your Metrics

Basic metrics such as the total income, total cost of goods, gross profit, total expenses, total other income and expenses, and net income provide a common language to communicate performance.

Knowing these metrics is critical for reading and understanding income statements.

Using the above example:

• The net sales shows combined labor and product sales are $33,772.36 .
• The cost of goods sold was $14,500 . That gets subtracted from the operating income above to reveal a gross income of $19,272.36 .
• The overhead or total operating expenses reached $7,763.74 .
• The net income before taxes was $10,642.28 . Subtracting $3,129.23 in taxes leads to the $7,513.05 bottom line.

Perform Trend Analysis

Comparison is at the heart of financial analysis. One of the most critical comparisons a business can make is by looking at past results to determine if performance in each recorded financial dimension is better or worse. Knowing how finances have changed reveals whether future adjustments are needed, or processes can stay the same.

For example, the above financial statement was made in February. How might operating costs differ in warmer months?

• Why Do You Need an Income Statement?

There are many compelling business reasons to make sure you’re able to produce an accurate income statement–beyond just understanding your net income or net loss. To start, GAAP requires public companies to provide income statements . You’ll need an income statement for the following:

• Loan qualification
• Investor contributions
• Tax preparation

Income statements are also required for public companies under GAAP (Generally Accepted Accounting Principles). Additionally, income statements provide a window into your company’s financial health to guide better business decisions.

• Advanced Usage

Companies use income statements to compare performance and find trends over different periods. The more income statements you have, the more comparisons you can make to identify new opportunities or trends in your operations.

Month-to-Month

Month-to-month statements compare fiscal performance every month.

The shorter timespan gives a clear view of a company’s immediate financial situation. Business owners can use the gathered information to identify problems with the company’s financial performance before they grow out of control. It’s also quite common for analysts to compare specific months when looking at year-to-year data.

These month-to-month statements are often more relevant for seasonal businesses because they are primarily used during a certain time of year. Some obvious examples include lawn care services, which are busier in spring and summer, and ski resorts, which only operate in fall or winter.

Quarter to Quarter

Quarterly statements cover a company’s finances for 3-month periods:

• Quarter 1: January, February, and March
• Quarter 2: April, May, and June
• Quarter 3: July, August, and September
• Quarter 4: October, November, and December

With slightly longer reporting periods, quarterly reports show the beginnings of long-term financial changes at a company.

Both monthly and quarterly reports may include an additional column showing year-to-date totals.

Year over Year

Year-over-year income statements provide even more value by showcasing how a company’s finances have changed over a 12-month period or fiscal year. These annual reports can reflect long-term success or reveal problems. Year-end income statements are also popular for reflecting on the last calendar year.

• Income Statements vs. Balance Sheets

An income statement is a financial report detailing net profits and losses over a period of time. A balance sheet is a snapshot report that details how much worth or value a business has in assets, liabilities, and shareholder equity.

Along with the cash flow statement, these documents are needed for a full overview of a company’s financial health. Accounting software can automate report generation with custom templates to keep all financial data in one location for easy sharing with stakeholders.

Further Reading:

How to make a balance sheet: step-by-step guide.

• What Is An Income Statement by AccountingCoach.com
• A detailed overview of financial ratios from Inc.com
• What's Included on an Income Statement?

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